Provident fund or EPF is a creature of the 1950s and has barely changed since then. The law was passed in 1952, and the EPF act was designed for the world of jobs for life and factory work. However, none of these exists now. There is a misconception about PF money. Many people think that they can use PF amount after their retirement as an investment option. In this blog, we will discuss why withdrawal of provident fund is required just after the moment you get unemployed.
Any company or organization with more than 20 workers must have to register under the EPF act. They have to deduct 12% from employee basic salary plus dearness allowance and must have to pay this amount to EPF. Now employer has to pay another 12% of your basic income plus dearness allowance into EPF system. Now the 12% deducted from employee basic salary goes completely to EPF. Whereas 12% paid by employer gets divided into 2 parts- 8.33% goes to Employees Pension Scheme and rest 3.67% goes to EPF. And out of these two segments EPF and EPS only, EPF earns interest.
However, many people are not aware of the fact that EPF interest is tax-free as long as you are an active subscriber in Employee Provident Fund. For example, due to any situation if you become unemployed, or left a job for kids or education or move to a smaller firm you cease to become an active subscriber. From that duration, your EPF interest becomes taxable. And in case you remain in the same situation for 3 long years then our EPF account will stop earning interest. And money in the account will lose value to inflation. So, the solution to such a situation is that in case if you move from one EPF registered organization to another, you can transfer your EPF balance instead of withdrawing money from EPFO.
One more drawback of EPF account is that you have no say in how to invest EPF money. This is decided by EPFO on a central level. It makes no difference between a young employee and senior employee who is approaching retirement closely. The money of both will be invested in the same way. As of EPFO invests 15% of fresh inflow in equities, this brings a good return. The investment is planned through ETF.
The best thing about EPF is that one can withdraw 100% of EPF balance after two months of unemployment. And you can invest your EPF amount more productively by investing it in schemes like PPF, NSC etc. You can learn more about the Public Provident Fund Investment and why investing here is beneficial.