Provident Funds

What are PFs

You may have heard that a salary offered by a company is drastically different from the salary you get in hand. Mainly this difference occurs due to income taxes. However, another hefty 12% of your salary is deposited to an organisation called EPFO. The money is invested in an Employee Provident Fund or, in simple terms, a PF.

Provident Funds are government-managed retirement savings schemes for salaried employees. A portion of your salary is used to aggregate the money in your Provident Fund account. High-Interest Rates are provided to offset the effects of Inflation. PF’s are generally considered a safe retirement investment plan with high-interest rates ranging from 8-9 % per annum and the government’s backing. It also acts as a Life Insurance plan after the death of the employee. The whole Fund is immediately released to the family members to alleviate their financial pains.

Available Options

Mainly, PF’s are of three types – General Provident Fund, Public Provident Fund, and Recognized Provident Fund. General PF’s are maintained by governmental bodies like the Railways and other bodies. Recognized PF’s are mainly for Private Organizations with more than 20 employees. PPF is a voluntary investment vehicle. On the other hand, Provident Funds are mandatory for employees earning less than Rs. 15,000 per month. Crossing that amount, you have the opportunity to decide what percentage of your salary is deducted for the PF. 12% of your salary goes into the EPF account. In comparison, the employer invests 3.67% into your Provident Fund Account and 8.33% into your Employee Pension Scheme Account. The rest of the principal is paid for managing your account.

Now, most of the facts stated here will apply when you start working for an organization. Nevertheless, suppose you are risk-averse and want to enter the investment arena. In that case, you can start investing in a Public Provident Fund (PPF). From a minimum deposit of Rs.50 to Rs. 1.5 Lakhs with a lock-in period of 15 years, students can invest and grow their surplus money. Holders can pay these every year in a lump sum or through a series of installments not exceeding 12 in one year. Like PF’s, all money invested in Public Provident Funds is non-taxable along with the accrued interest. In addition, partial withdrawals can be made after five years of investment not exceeding 50% of the total principal amount.

So, how do you open an account? Citizens can open an account at any Indian Post Office or any bank authorized by the Government of India, which includes almost all private and public sector banks. Documents required for opening an account include: Proof of Residence, Proof of Identity, along with a couple of bank-related documents. You can also open your account online through significant banks like HDFC Bank, ICICI Bank, etc. Generally, you only need to fill up the online application form, and your PPF will be created in a couple of days. PPF account holders can also request loans after one year of investment and before five years of completion of the investment. The loan amount does not exceed 25% of the amount in the PPF account, and another loan cannot be sought until the previous dues with interest are paid.

Why PFs?

However, why should you even opt for investing in a Provident Fund? Though the income deductions may seem unfair, in the end, PF’s are a low-risk strategy of appreciating your capital. Moreover, the principal amount and the accrued interest are non-taxable, which means you save much income by avoiding taxes on the specified principal. Furthermore, Provident Fund Accounts are universal. The government provides you with a Universal Account Number (UAN) when you create your PF account. This number helps track your Provident Fund balance, your claim status, and when you change occupations. The account and the amount present are transferred to the new employer without any taxes or charges. Upon investing, if you wish to withdraw money, the government has specified specific rules. After retirement (58 years of age), you can withdraw the whole amount. Before retirement, you can partially withdraw money if emergencies arise. However, they would be taxed if you withdraw them before five years of creating the EPF account.

You may ask who is handling these activities on such a large scale. The Government of India established the Employees’ Provident Fund Organisation (EPFO) on 4th March 1952. EPFO assists the government in running the world’s most extensive state social security program. At present, it maintains more than 19.34 crore accounts of its members. The organization has formed several bilateral agreements with other countries to include international employees in this scheme too. The Central Board of Trustees (CBT) is the apex decision-making body. It is under the jurisdiction of the Ministry of Labour and Employment. Besides the Employee Provident Fund, EPFO also provides an Employee Pension Scheme (EPS). After retirement, the employee receives a monthly pension from the government from the EPS. Employee Pension Scheme provides you with a monthly pension after retirement or disablement. Both the employer and the government put in a stipulated amount every month for your EPS. However, if your monthly salary + Dearness allowance is more than Rs. 15,000 per month, then you are not eligible for the EPS scheme.