PF Registration

Why Provident Fund is Important to the Salaried Class?

Employee Provident Fund is one of the most popular and promising tools for investment as well as for retirement planning. A statutory body governs employee Provident Fund under Ministry of Labour and Employment, Government of India called as Employee Provident Fund Organization. This regulatory body supervises this tax-free social security scheme to benefit retiring employees by providing provident fund, pension, and insurance scheme.

Here in this article, we will discuss various benefits of the provident fund concerning the employed class:

When the Employee Provident Fund scheme came into existence?

Employees’ Provident Funds Ordinance was promulgated on 15th November 1951 for benefiting employees after retirement. Since its inception, this act has been amended for 15 times.

Who is eligible for the Employee Provident Fund?

All the organizations employing 20 or more employees are eligible for this social security scheme. Any person engaged in Government, Public or Private sector is qualified to get the benefit of this scheme. Currently, the rate of interest on employee provident fund is 8.55% which is five-years low.

What was the primary purpose behind the Employee Provident Fund?

Employee Provident Fund was framed with the intention to provide financial stability and security to retiring employees. An Employer is liable to contribute towards provident fund on a regular basis once an employee joins the organization. Here both employer and employee contribute @12% of employee’s wages towards Employee Provident fund.

Provident fund is a tax-free interest amount which secures constant growth of employee’s money. Longtime investment of provident fund can ensure meeting of employee’s requirements including his retirement goals.

What are various reasons why a provident fund is vital to the salaried class?

Provident fund amount has various benefits to employed people to secure their future after retirement and even during the tenure of their service. Multiple advantages of provident fund amount are as below:

• Retirement and pension benefits: To provide financial security to retiring employee, Government introduced two essential elements in Employment provident fund that is provident fund and Employee Pension Scheme. Here both employer and employee need to contribute 12% of remuneration. The whole of the employees’ contribution is diverted towards Employment provident fund and out of employer’s 12% contribution, 8.22% diverts towards Employee Pension Scheme, and rest amount is transferred to provident fund of the employee.

This amount contributed receives to the employee after retirement in the form of pension. This pension amount is associated with a number of years of service and remuneration withdrawn by the employee at the time of employment. A retiring employee can also receive lump sum EPS amount along with the provident fund amount, which generally depends on last withdrawn average salary and duration of service as well as the department.

• Tax exemption: Employee provident fund is eligible for tax exemption as per provisions of Section 80C of Income Tax Act, 1961. So employee does not need to pay tax on interest earned from provident fund. The Current rate of interest is around 8%. Even if the provident fund is lying dormant even for a period more than three years, it continues to earn the interest.

Furthermore, provident fund amount if withdrawn after five years of continued service is not taxable, unless the employee gets termination from the service due to some reason.

• Insurance benefit: For the benefit of employees, the government has made provision. As per that if in any organized group insurance scheme is not provided to the employees, the organization has to furnish 0.5% of the basic monthly salary towards the premium for life insurance policy. This benefit is assured under the Employees Deposit Linked Insurance Scheme (EDLI) started by the government.

As per the coverage, the registered Nominee will get a lump-sum insurance amount in the event of the death of an insured person during the period of his service. Recently, the minimum insurance amount limit has been increased to Rs. 2.5 lakh from Rs. 1.5 lakh before. The maximum insurance amount a person can get is Rs.6 lakh.

• Early withdrawal option: Being a social security scheme, provident fund money can be withdrawn prematurely. But Employee Provident Fund Organization has imposed certain restrictions on early withdrawal of whole provident fund amount to benefit employees even after retirement. But an employee can take out partial provident fund amount to meet specific needs or in case of an emergency such as medical emergency, marriage purpose, education, home loan, etc. EPFO has authorized the withdrawal of only 50% of employee contribution towards a provident fund in case of marriage, education or other expenses.

Similarly, employee can withdraw an amount up to 36 times the monthly salary cum Dearness Allowance in case of home renovation or construction. Moreover, employee can take advantage of PF in the event of major surgery or severe disease. In this case, employee can withdraw up to 6 times of his monthly salary or entire provident fund amount.

• Exorbitant return on investment: Employee can get a higher return on provident fund comparing to investment in any other form. Employment provident fund organization invests 5 to 15% of its provident fund deposits with Exchange Traded Funds, which earns interest however low.

Moreover, up to 50% of the said deposits are invested in government securities, money market instruments, etc. Nevertheless, the government is working on investment in other major sectors so that provident fund deposit can earn more interest to help employees.

• Benefits about home advances: Special benefits are given to employees if they want to invest to buy or construct a house. An employee is authorized by Employee Provident Fund Organization to utilize up to 90% of the provident fund amount to acquire, construct or to make down payment to purchase a residential property. But there are certain preconditions that employee has to fulfill in order avail this benefit.

Conclusion:

Provident fund, a tax-exempted social security scheme, is one of the most promising investment plans for retiring people. But the government needs to make some new provisions concerning the interest earned on provident fund amount which is only 8.55% to secure the future of retiring people. Longtime investment of provident fund amount ensures meeting of employee’s requirements including his retirement goals.

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Also Read: All about EPF (Employee Provident Fund)