This is the 7th article coming in the series of Retirement Planning. In our previous article (Retirement Planning – 6), we have discussed many things about Reverse Mortgage as a Retirement Tool. In this article we will discuss about Provident Fund (PF) and how it can be a better Retirement Planning tool.
Provident fund is a scheme by the Government of India by which a fixed percentage is deducted from your salary and a fixed percentage is added by the company. This sum is kept in an account, which accumulates and is then received back after retirement. Provident fund is essentially a retirement benefit scheme. Under this scheme a specified amount is deducted from the salary of the employee as his contribution towards the fund. The accumulated amount together with the interest is paid to the employee at the time of his retirement or resignation, in case of death of the employee the accumulated balance is paid to his legal heirs.
The Employees' Provident Fund Organization (EPFO) of India is a state sponsored essential contributory pension and insurance scheme. It is one of the main social security organizations in the world in terms of members and volume of financial transactions undertaken.
According to Section 2(f) of the Act employee means any person who is employee for wages in any kind of work manual or otherwise, in or in connection with the work of an establishment and who gets wages directly or indirectly from the employer and includes any person employed by or through a contractor in or in connection with the work of the establishment.
Basic Wages means all emoluments which are earned by employee while on duty or on leave or holiday with wages in either case in accordance with the terms of the contract of employment and witch are paid or payable in cash, but does not include the following;
• The cash value of any food concession;
• Any dearness allowance (that is to say, all cash payment by whatever name called paid to an employee on account of a rise in the cost of living), house rent allowance, overtime allowance, bonus, commission or any other allowance payable to the employee in respect of employment or of work done in such employment.
• Any present made by the employer.
• According to sec 2(f) of the Employees' Provident Fund Scheme “Exclude Employee” means an employee who having been a member of the fund has withdraw the full amount of accumulation in the fund on retirement from service after attaining the age of 55 years; Or An employee, whose pay exceeds Rs. 5000 per month at the time, otherwise entitled to become a member of the fund.
• 'Pay' comprise basic wages with dearness allowance, retaining allowance, (if any) and cash value of food concessions admissible thereon.
Types of Provident Fund
• Statutory Provident Fund (SPF)
• Recognized Provident Fund (RPF)
• Unrecognized Provident Fund (URPF)
• Public Provident Fund (PPF)
Statutory Provident Fund (SPF)
Statutory Provident Fund is maintained by the Government and Semi-Government departments like Railways, Reserve Bank of India, Colleges, Universities, Local bodies, Insurance companies etc, The employer’s contribution to the employee’s SPF and the sum of interest on the accumulated balance to the employee’s credit balance are not to be included in the income of the employee and so it is ignored.
Recognized Provident Fund (RPF)
It is a fund to which the Commissioner of Income-tax has given the recognition as obligatory under the Income-tax Act.
Unrecognized Provident Fund (URPF)
It is the Provident Fund, which is not recognized by the Commissioner of Income-tax. The employee and employer both donate towards this fund. The employee’s contribution to URPF will not be allowed any tax rebate.
Public Provident Fund (PPF)
Self-employed people (doctors, lawyers, accountants, actors, traders, pensioners) can also enjoy the advantage of tax rebate under section 88 by contribution to PPF.
How PF affects payroll
As per Amendment dated 22/9/1997, in the Act, both the employees and the employer donate to the fund at the rate 12% of the basic salary, dearness allowance and retaining allowance if any, payable to employees per month. i.e. 12% (Basic + D.A. + R.A).
Withdrawal of PF
• Criteria for Withdrawal of PF
• Withdrawal before retirement
• Partial Withdrawal/ Advances
Criteria for Withdrawal of PF
A member of the PF can withdraw the full sum on retirement from service after attaining the age of 55. The full amount can also be withdrawn if:
• A member who has not attained the age of 55 at the time of termination of service.
• Member is retired on account of permanent and total disablement due to bodily or mental infirmity.
• On migration from India for permanent settlement or employment abroad.
• In case of mass or individual retrenchment.
Withdrawal before retirement
A member can withdraw up to 90% of the amount of PF after attaining the age of 54 years or within one year before actual retirement, whichever, is later.
Partial Withdrawal/ Advances
A member of provident fund can avail non-refundable advance for the following purposes:
• For acquiring immovable property.
• Advances in special cases such as lock out in factory/establishment.
• For treatment of illness.
• For marriages or post matriculation education of children.
• Financing of member's life insurance policy.
Criteria: Advances/loans for building a house or marriage purposes need a minimum completion of 5 years of membership of the fund, in other cases a minimum membership of 7 years is required.
>>>>>Click here….to know more about Traditional Retirement Plans
When Provident Fund Savings are Taxable?
The general perception that whatever is the balance with the Provident fund is non taxable at the time of withdrawal, though, it is not entirely correct, there are circumstances when even the savings in provident fund (accumulated balance) becomes taxable. Sub section 12 of Section 10 of the I T Act exempts all payments from any provident fund set up by Central Government or any provident fund on which Provident Fund Act applies. This means, if employees of Central government or State Government or of any employer whose fund are managed by Provident Fund authorities, any payment from such provident fund is total exempt.
Wherever employer maintains provident fund of the employees through a trust and gets recognition from Commissioner of Income tax for such trust, the employee has to be careful regarding the taxability of accumulated balance, because the payments from such recognized provident fund is taxable in certain circumstances. Sub section 12 Section 10 of the I T Act gives exemption to payment from recognized provident fund as under sub sec(12) the accumulated balance due and becoming payable to an employee participating in a recognized provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule.
Conditions to be fulfilled to make payment from recognized provident fund Tax Free
Rule 8 of Part A of the Fourth Schedule of I T Act provides the circumstances under which the accumulated balance payable to an employee is exempt from tax. If employee fulfills any of following conditions, payment from recognized provident fund is tax free:
• If he has provide continuous service with his employer for a period of five years or more.
• If, though he has not provided such continuous service, the service has been terminated by reason of the employee’s ill-health, or by the contraction or discontinuance of the employers business or other cause beyond the control of the employee.
• If, on the termination of his employment, the employee acquire employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognized provident fund maintained by such other employer.
How the Employees' Provident Fund Scheme works:
As per amendment-dated 22.9.1997 in the Act, both the employees and employer donate to the fund at the rate of 12% of the basic wages, dearness allowance and retaining allowance, if any, payable to employees per month, the rate of contribution is 10% in the case of following establishments:
• Any covered establishment with not more than 20 employees, for establishments cover prior to 22.9.97.
• Any sick industrial company as defined in clause (O) of Sub-Section (1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 and which has been stated as such by the Board for Industrial and Financial Reconstruction,
• Any establishment which has at the end of any financial year accumulated losses equal to or more than its entire net worth and
• Any establishment engaged in manufacturing of (a) jute (b) Breed (d) coir and (e) Guar gum Industries/ Factories, the contribution under the Employees' Provident Fund Scheme by the employee and employer will be as under with effect from 22.9.1997.
1. A member of the provident fund can withdraw total amount at the credit in the fund on retirement from service after attaining the age of 55 year. Full amount in provident fund can also be withdrawn by the member under the following circumstance:
· A member who has not attained the age of 55 year at the time of termination of service.
· A member is retired on account of permanent and total disablement due to bodily or mental infirmity.
· On migration from India for permanent settlement abroad or for taking employment abroad.
· In the case of mass or individual retrenchment.
2. In the case of the following contingencies, the payment of provident fund is made after complementing a continuous period of not less than two months immediately preceding the date on which the application for withdrawal is made by the member.
· Where employees of close establishment are transferred to other establishment, which is not covered under the Act.
· Where a member is discharged and is given retrenchment compensation under the Industrial Dispute Act, 1947.
>>>>>Click here…toknow the Income Tax Rate for the Assessment Year 2009 - 2010
Importance of Employee Provident Fund
Employees' Provident Fund Scheme takes care of following needs of the members:
• Medical Care
• Family obligation
• Education of Children
• Financing of Insurance Polices
Five Things to know about Provident Fund
Withdrawal before retirement:
A member can withdraw up to 90% of the total amount of provident fund at credit after attaining the age of 54 years or within one year before actual retirement on superannuation whichever is later, claim application in form 19 may be submitted to the concerned Provident Fund Office.
Accumulations of a deceased member:
Amount of Provident Fund at the credit of the deceased member is allocated to nominees/ legal heirs. Claim application in form 20 may be submitted to the concerned Provident Fund Office.
Transfer of Provident Fund account:
Transfer of Provident Fund account from one region to other, from Exempted Provident Fund Trust to Unexampled Fund in a region and vice-versa can be done as indicated by Scheme; transfer application in form 13 may be submitted to the concerned Provident Fund Office.
The member of Provident Fund shall make a declaration in Form 2, a nomination conferring the right to obtain the amount that may stand to the credit in the fund in the event of death. The member may furnish the particulars relating to him and his family, these particulars furnished by the member of Provident Fund in Form 2 will help the Organization in the building up the data bank for use in event of death of the member.
Annual Statement of account:
As soon as possible and after the close of every period of currency of contribution, annual statements of accounts will be sent to each member through of the factory or other establishment where the member was last employed. The statement of accounts in the fund will show the opening balance at the beginning of the period, amount contribution during the year, the total sum of interest credited at the end of the period or any withdrawal during the period and the closing balance at the end of the period, member should satisfy themselves as to the accuracy of the annual statement of accounts and any error should be brought through employer to the notice of the correctness Provident Fund Office within 6 months of the receipt of the statement.
Comparison between PF vs. PPF
The comparison is made on the basis of certain criteria that are given below;
· What are PPF and PF?
· Return on the investment
· The money blocked till
· If you need the money
What are PPF and PF?
The Employee Provident Fund or provident fund as it is in general referred to be a retirement benefit scheme that is available to salaried employees. Under this scheme a stipulated amount (currently 12%) is deducted from the employee's salary and contributed towards the fund. This amount is decided by the government. The employer also contributes an equal amount to the fund.
However, an employee can contribute more than the specific amount if the scheme allows for it. So, let's say the employee decides 15% must be deducted towards the EPF. In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated which is 12%.
The Public Provident Fund has been recognized by the central government. You can voluntarily decide to open one. You need not be a salaried individual; you could be a consultant, a freelancer or even working on a contract basis. You can also open this account if you are not earning. Any individual can open a PPF account in any nationalized bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices. The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.
Return on the investment
- EPF: 8.5% per annum
- PPF: 8% per annum
The money blocked till
The amount accumulated in the PF is paid at the time of retirement or resignation. Or it can be transferred from one company to the other if one changes jobs. In case of the death of the employee the accumulated balance is paid to the legal heir.
The accumulated sum is repayable after 15 years. The complete balance can be withdrawn on maturity that is after 15 years of the close of the financial year in which you opened the account. It can be extended for a period of five years after that. During these five years you earn the rate of interest and can also make fresh deposits.
If you need the money
If you immediately need the money you can take a loan on your PF. You can also make a premature removal on the condition that you are withdrawing the money for your daughter's wedding (not son or not even yours) or you are buying a home. To get these details, you will have to talk to your employer and then get in touch with the EPF office; your employer will help you out with this.
You can take a loan on the PPF from the third year of opening your account to the sixth year. So if the account is opened throughout the financial year 2009-2010 the first loan can be taken throughout financial year 2011-2012 (the financial year is from April 1 to March 31). The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. You can make withdrawals throughout any one year from the sixth year. You are allowed to withdraw 50% of the balance at the end of the fourth year, proceeding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
We believe this article helped you to understand clearly about Employee Provident Fund (EPF/PF) and how it helps you to create a strong financial back up for your retirement. PF is one of the best avenues available for your retirement planning. In our next article we will discuss about National Savings Certificate and how it helps you in your retirement planning.