Understanding the Concept of Provident Fund : Defining EPF


Employment provident fund is the modern method of pension. It is a retainer from employees salary for future retirement times. Out of Employees salary a part equivalent to 12% is deducted and the same is added from Employers pocket into the fund, The sum adds up to the pension fund of the employee. Now out of this EPF, Employees 12% share goes directly into the fund, but the employer’s share above 3.67% goes to Employee’s Pension Scheme. This eventually is directed by the Government into the securities offered by RBI or Centre (safe investment). Thus on this investment the government earns almost 8% to 13% interest every year.

Under EPF every employee gets a UAN. This is the Universal Account Number generated by EPFO. By this the employee gets access to the provident fund scheme and the employee gets the same account for any job applied to. Hence the employee’s money remains safe in his or her account though the job changes multiple times.

Provident Funds

Provident funds are the investment of employees in form of their future financial security. As mentioned a fixed 12% is the contribution from both the sides. Hence every year the Employee gets an annual benefit of 24% and individual raise of 12% in savings (given that the first 12% is from own pockets).  

The pension funds are mandatorily running under Government purview. The simple reason is that too much risk could result in losing savings of the employees. This scheme is run by  a central government organisation. In India such an organisation is named EPF. Employee provident fund organisation takes the employer’s 8.33% and invests it into safe securities of various governments and their treasury bills.

Benefit on Part of Employees and Government

With a simple view the employees only get an extra over their salary for future savings. But if viewed carefully lots of their savings are turning into waste. The reason is the inflation rate. In India the inflation rate currently is 4.9%. Hence if a person doesn’t earn a minimum of 5% return from his money, the value of money is deteriorating anyhow.

This downsizes the return of employees from 12% of employers to approximately 7%. Now let’s set aside the interest an employee could earn if he had access to the 12% of his salary. Hence the employee loses the potential interest income and the 5% of inflation. This all is related to making the future of employees. Whereas in fact the government is benefiting more from it. The government gets the tax as well as the interest income from the 8.33% of employers. 

But however this corpus is a safe fund for employees. This gives them the future financial support. Also this fund could be partially withdrawn after sometime. This includes the on job option as well as the situation after resignation or termination. 

Usage and Withdrawal of EPF

First of all the on job option leaves you with multiple purposes. The fund can be withdrawn for Children education or wedding, Construction or buying a house, funding financial emergencies and many more. Now in case the person becomes jobless he can get 75% of the fund access after 1 month of the same. After 2 months he can get full access to the fund. 

However the minimum age for withdrawal is set at 55 years in India without any situation or condition. However the withdrawal rules differ in every country.

Money Withdrawal Procedure

The money can be withdrawn at any point of time. If the withdrawal is premature, then a penalty is applied on it. However the procedure for withdrawal in India is mentioned below :

The person can use any of the options namely UAN or Aadhar Card or Digital Signature. Then the person needs to fill in a form named FORM 13 for online transfer of funds. For withdrawals the person needs to fill FORM 31, FORM 19 and FORM 10C which are related to Withdrawal of PF funds, PF settlement and Pension withdrawal respectively.

Ideal Way to Deal With PF Money

Once the maturity is arrived one should withdraw the PF money. Later on the money should be put in parts into safe investments. The equity part should be the least in the list, the reason is the high risk associated with it and the money’s for future support. Hence one should opt for Government securities or FD or Securities related mutual funds.

Also one should keep 30 to 40% of his PF in Liquid form in the bank so that the cash could be utilized in tough times. This would provide a multiplying effect to the PF money at the end of the procedure.

PF Information

One can get the constant updates about the PF on EPFO website. One needs to visit it and Submit the UAN along with the password. This allows a person to view and download his statements to keep a track of the savings and plan accordingly.

Always remember PF money should be kept away from Risk as much as possible. It is the aid in retirement and hence it shouldn’t be placed into risky investment tools.

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