IndianMoney.com Research Team | Updated On Monday, January 20,2020, 04:34 PM
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Rising inflation and layoffs call for the need for proper retirement planning. Retirement planning is essential to enjoy a stress free retired life.
Employee provident fund is a forced retirement scheme introduced by the Government of India. Every salaried employee contributes 12% of basic salary to the EPF. The employer also contributes an equal portion to the EPF.
With rise in salary, your EPF also steadily rises. This is because the contribution towards EPF is a fixed proportion of the salary. This helps in building a good amount for retirement life.
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When Can You Withdraw EPF Early?
To make your EPF more effective, you can consider the following points:
Hold account till retirement: Rules regarding withdrawal from EPF accounts have become flexible in recent times. This has resulted in withdrawal from EPF to meet short-term requirements. There are a number of situations under which you can partially or fully withdraw from EPF. Unless the situation is genuinely demanding, experts advise not to withdraw your EPF account until retirement.
Compounding works wonders if your account is left untouched along with incremental contributions each year. Partial withdrawal means you lose the compounding benefit.
Increase contribution via VPF (Voluntary Provident Fund): Besides the EPF, you can increase the contribution to Employee Provident fund beyond 12% via the voluntary provident fund (VPF). VPF is an extension of EPF, with the same tax benefits. There are no limits on the contribution. Increasing your PF contribution reduces your monthly take-home salary, but this can be useful in building a huge retirement corpus.
If you are nearing retirement, you must consider doing this, as financial stability in the retirement phase is of utmost importance. However, keep in mind VPF has restrictions on withdrawal. You can withdraw the amount only on reaching retirement, or in unemployment.
Rollover account with jobs: Ensure you transfer the existing EPF account to the new employer, when you are changing jobs. Otherwise, this can create problems. If you do not transfer the existing balance, tax liability increases. The account will continue to fetch interest, and tax will be levied on the interest component. The five-year continuous service clause for tax exemption is reset to the new account date, if your existing account is not transferred to the new job.
There are basically 5 scenarios under which your provident fund becomes tax-exempt. Any other situation will levy tax on your PF account. These are:
EPF has withdrawn after 5 continuous years of service: No TDS (tax deduction at source) is charged if EPF is withdrawn after 5 continuous years of service. This will not be taxed as part of IT return.
Transfer of PF from one account to another on a change of job: No TDS. This will not be included in ITR, as it is tax-exempt.
Less than Rs 50,000 withdrawn before completion of 5 continuous years of service: No TDS. But if the individual falls in the taxable bracket, the EPF withdrawn will be included in the ITR.
More than Rs 50,000 withdrawn before completion of 5 continuous years of service: if PAN details are submitted, TDS will be deducted at 10%. Otherwise, the maximum marginal tax rate is levied. If forms 15G/15H are submitted, no TDS is deducted.
Employment terminated before 5 continuous years of service due to different reasons: This could be due to health reasons, unavoidable situations like employer closes down the business and so on. In this case, there will be no TDS. The employee need not mention this in ITR, as the withdrawal is tax-exempt.
There could be genuine reasons for early PF withdrawal. Let’s take a look at a few of these situations and their features.
Marriage: Money can be withdrawn from the EPF account for your marriage, siblings or children. For this, 7 years of service must be completed. Up to 50% of the employee’s share of contribution can be withdrawn.
Education: This includes your education or of spouse and children after Class 10. For this, the eligibility criterion is the completion of 7 years of service. Up to 50% of the employee’s share of contribution can be withdrawn.
Job Loss: If you are unemployed for 1 month, he/she can withdraw up to 75% of the total amount. The balance can be withdrawn if unemployment exceeds a month.
Medical Emergency: Money can be withdrawn for treatment of self or family members. In such a situation a medical certificate has to be signed by the doctor and the employer stating the current scenario. The amount withdrawn must be equivalent to 6 months basic wages and dearness allowance or the employee’s share with interest, whichever is the least.
House Renovation: To withdraw cash for the purpose of house renovation, the property must be registered in the name of the employee/spouse/jointly. 5 years of service must be completed to avail the same. Up to 12 times of the monthly wages can be withdrawn.
Purchase of Land/purchase or Construction of a House: 5 years of completion of service is the basic criterion to withdraw under this situation. The asset, land or house must be in the name of the employee/spouse/jointly. Limits on amount are as follows:
For house: 36 times of monthly wages + dearness allowance
For land: 24 times of monthly wages + dearness allowance.
7. Home loan repayment: 10 years of service must be completed to withdraw from EPF. A maximum up to 90% from both the employee and employer’s contribution can be withdrawn. Other prevalent conditions are:
The property must be registered in the name of the employee/spouse/jointly.
The member’s PF account or combined with the spouse’s account, including interest must be more than Rs 20,000.
Withdrawal permitted is subject to submission of required documents called for by the EPFO, relating to the housing loan availed.
8. A little before retirement: Up to 90% of the total amount in the account can be withdrawn. The employee has to be 57 years old to avail this.
If wisely implemented, EPF is an effective way to offer financial stability during the retirement stage. It has tax benefits. It can also serve as an emergency fund during demanding situations.
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