Supplement your Provident Plans

This could happen to anyone. Suppose you switch jobs, from a smaller organisation to a much larger company, with a huge jump in salary. The hike has you ecstatic—till pay day. For, that’s the time you find a huge chunk of your ‘hefty’ salary missing. It has gone as tax and into the Provident Fund (PF). While almost everyone has reconciled to living with taxes, it’s not the same for PF. Why should the money go to such a fund when your retirement is years away and there is plenty of time to plan your finances? Don’t you deserve to have a say in the contribution you make every month to the PF?

But then, say your elders and betters, the PF ensures that you make regular savings from your salary. This money accumulates over the years and comes to you as a lump sum when you retire—as good as a small pension for life.

8.33% of the contribution by the employer is put in the Employees’ Pension Scheme 1995.

12% of an employee’s basic salary+DA and the same amount by employer is the minimum PF investment

Assume you’re 30 years old and plan to retire at 60. Your basic salary is Rs 15,000 a month and you expect it to grow at 10% every year. With an EPF contribution of 12% per month (or more if you wish to) and a fixed 12% contribution by the employer, your total accumulation before retirement will be Rs 1.35 crore. Even with a 5% increment in basic salary every year, your corpus will grow to Rs 61.8 lakh in 30 years. With the returns guaranteed by the government, the EPF is by far the safest retirement planning instrument for the working class.

Now, add pension to this. Of the 12% contribution that the employer makes, 8.33% is diverted to the Employees’ Pension Scheme (EPS), which offers a defined benefit at the age of 58 years. This contribution is capped at Rs 6,500 per year or Rs 541 a month. The Rs 541 invested every month in an instrument earning 8.5% will total Rs 3,39,206 after 20 years and Rs 8,93,032 after 30 years. This money is invested in an annuity to give a monthly pension after you retire.

Apart from all this, you can withdraw from this corpus after a specified period. Financial planners, of course, abhor the thought of dipping into retirement funds, but the fact is that sometimes the present is more important than the future. For instance, you might want to pay for a medical treatment that allows you to get back to work, rather than think of retirement.

However, there are certain restrictions with every kind of withdrawal. To take out money for housing, for instance, you need to be a member of the Employees’ Provident Fund Organisation (EPFO) for at least five years, and the maximum amount you can withdraw is the basic salary plus dearness allowance for 36 months, or the cost of construction, whichever is lower.

The New PF With fresh rules, the EPFO could offer more

Till last year, the management of the EPF corpus was guided more by political whim than by performance. But changes are taking place. Three new fund managers—ICICI Prudential AMC, HSBC AMC, Reliance Capital AMC—have been chosen to manage the funds that will be deployed in the EPF account. State Bank of India will continue to be a fund manager. The new managers will take care of fresh funds that flow into the EPF. Companies are increasingly opting to manage their PFs privately through exempt trusts. The cost of administering an exempt trust is much lower, which allows the fund to offer higher returns to its members.

So shouldn’t we just stick to the PF for our retirement planning? No, because the money you get from this fund may not be enough for a comfortable retired life. You will have to beef it up with other investments. The PF helps you give a start— and shows just how far you are from the mark.

Then, there’s the problem of fund management. Till last year, the management of the EPF was guided more by political whim than by performance. But in 2008, the EPFO chose three new fund managers— ICICI Prudential AMC, HSBC AMC and Reliance Capital AMC—to manage the EPF corpus. While SBI will continue to be a fund manager, the new managers will take care of fresh funds that come into the EPF.

Service is another area that the EPFO has been known to ignore. This has prompted several companies to create their own PF schemes under an exempt trust. These exempt schemes offer better fund management at a lower cost.

Says Sushil Kumar Jain, chairman, Pioneer Group of Companies and managing partner Sushil Jeetpuria & Co., a PF management company: “The cost of administering an exempted trust is definitely much lower than being a part of the EPFO. This is incentive enough to move out as you match the returns or even earn more.”
Cost aside, exempt trusts also offer better returns. Says Amit Gopal, Vice-President, India Life, a company that advises on Provident Fund: “Prior to 2000, we earned more than what the EPF paid as its declared rate. Considering that we have to follow the same investment pattern as the EPFO, it indicates that there is scope to earn more than what is paid by the EPF.”

PF FAQs A primer on the rules governing the Employees’ Provident Fund

What is Provident Fund (PF)? It is a mandatory retirement benefit plan, wherein contributions are made by the employer and the employee. Employees get tax benefits on contributions and a taxfree lump sum on retirement. What is the rate of contribution to the PF? A member has to contribute 12% of salary or wages (basic+dearness allowance) with a matching contribution by the employer. Can an employee voluntarily contribute more than the stipulated 12% of salary? Yes, an employee can contribute more, but this voluntary higher contribution need not be matched by the employer. Can a member change the contribution midway through a financial year? No, he can do so only at the beginning of a financial year. What is the interest rate on the PF? The current rate is 8.5% per annum. How does one find out one’s PF balance? A statement is issued every year by the PF trust showing the contributions and interest credited, along with other details such as transfers received, loans availed of, etc. Can the balance be transferred if the member changes jobs? An employee can transfer his PF balance to the new employer by submitting Form 13. Is there any tax deduction when you withdraw your PF balance? There is no tax deduction if the member has put in five years of continuous service with the employer (includes period of past membership with previous employer/s if there is a transfer). Otherwise, the member is liable for deduction of tax. Can a member withdraw contributions to the Employees’ Pension Scheme 1995? Yes, he can do so by submitting form 10-C. But this is possible only if he has not completed 10 years of service.