Most people choose investment schemes to create a retirement fund for themselves. For this, they invest money during their employment years from their income. With the help of the right investment plans and thorough market research, anyone can create a huge corpus for their retirement life. But sometimes, setting aside money from income is not possible due to other commitments. In such cases, employed people can take the help of EPF. EPF contributions allow investment directly from the income and that too in small proportions. Carry on reading to know more about what is EPF and why every employee must invest in it.
What Is EPF?
EPF, stands for Employee Provident Fund which is an investment scheme for employees working in companies with a strength of more than 20. Now it is not necessary that such employer registers themselves with EPF. So if the company doesn’t have EPF registration, the employee can register themselves into this scheme without the employer. Although EPF is mandatory, employees can also opt out of an EPF account if they haven’t yet registered themselves, that is if the employer gives permission.
EPF is a sub-category of pension schemes for private employees. Only government employees have pure pension schemes via the General Provident Fund (GPF) in India. To become eligible for EPF, the employee must have a basic pay of more than INR 15,000 and have employment in an EPF eligible company. People outside the eligible category of EPF or GPF can enrol themselves in the Peoples Provident Fund or PPF, which is a similar scheme but open to everyone without the discrimination of employment status or income range.
Functioning Of EPF And EPF Contributions
After understanding what is EPF, you must also understand its functioning and how the EPF contributions work. Under the EPF scheme, the employer deducts a portion of your basic pay, doubles it with their own money and contributes that total amount as an EPF contribution. So you only pay half of the total EPF contribution, and the employer pays the other half at their expense. In this way, your EPF account gets monthly contributions from you and your employer till the day you retire or reach the age of 58.
Now, this accumulated fund also attracts a hefty interest rate of 8.1%, which is much more than any other capital-guaranteed investment scheme available in India. So you can accumulate a lot of money from your contribution, the employer’s contribution and the EPF’s contribution.
Calculating The Interest Rate For EPF Contributions
The interest rate of EPF is done at the end of every month, but the interest credits are only once a year, around 31st March. So even if you have an un-fixed salary due to some of the other reasons, your contribution will attract interest. EPF uses compound interest, so you can quickly increase the total corpus with the power of compounding.
If you start EPF in April and the total monthly EPF contribution from you and your employer is INR 1,000, then that amount will gain 8.1% and become INR 1081 by the end of the first month. And in the second month, when another contribution comes, the total amount will be INR 2081, and with 8.1% interest, it will become INR 2249.56 by the end of the second month. And this continues for the remaining months till the end of the year.
But as the interest credit happens only once a year, the balance till 31st March will show only INR 12,000. EPF then contributes the interest gained during the entire year on 31st March, and the balance will show the total invested amount and all the compound interest gained. And the cycle continues for the upcoming years. Because of compound interest, you can almost double the investment in a short span of 15 to 20 years. This is why people prefer EPF as an excellent investment scheme rather than a pension scheme.
Benefits Of Investing In EPF
Besides the high returns, high interest rates, and a retirement fund EPF also has several other benefits. EPF gives liquidity to its account holders through partial withdrawal and loans. So in case of any emergency, you don’t need to look for other sources of money when you already have a nice amount in your EPF account. Another major benefit of investing in EPF is that it is not dependent on the market like other popular investment schemes. So even if the market conditions are bad, you will get back your invested capital, although the interest rates can vary each year.
Now that you know what is EPF and why you should invest in it, what is stopping you from opening an account? Through the small EPF contributions over the years, you can generate a huge corpus for your retirement life. And it won’t even have any effects on your present lifestyle as you only have to let go of around 12% of your basic pay and not even of the entire salary. So invest in EPF right away if you still haven’t started investing. And gift yourself a financially secure and happy retirement life.