EPF or the Employees Provident Fund is the way for most salaried Indians to save some amount of money from what they earn. It is designed to provide financial security for the future or to give access to funds in case of an emergency, illness, big celebrations, buying or renovating a house etc. Under this scheme (any employer with more than 20 employees comes under the scheme) employees must contribute 12% of their income into the EPF fund. The employer matches that amount and pays it into the employee’s EPF.
EPF is perfect for the risk averse; who feel uncomfortable about market volatility. This is a safe and secure home for one's savings. Since the employee and the employer both contribute, the EPF is a great option for most people. It earns compound interest and as such the employee’s savings enjoy regular, steady growth.
Not only is EPF risk free; but contributions made into this account are also eligible for tax deduction (unlike fixed deposits of equity investments). So the longer one stays in employment, the bigger is the corpus at the time of retirement. There is also a built-in insurance component.
It is a fallback for lean times, as in the case of the recent pandemic lockdowns. Many people lost their jobs or found that they were earning less. In this scenario, people were able to rely on the corpus collected in the EPF to tide them over. Certain percentages can be withdrawn from the EPF for events such as a marriage, for education, hospitalisation or other large expenses.
There is also the concept of voluntary PF, where the employee can contribute more than the mandatory 12% into their account as and when they want. The whole corpus is paid out to the employee upon superannuation (retirement), which can be a significant amount. For most employees this acts as security for their later years.
The EPF is available for employees, however it is not available to self-employed individuals, professionals and so on. Such individuals can opt for PPF (public provident fund) that offers fixed compound interest, has tax deduction benefits and is tax free on withdrawal.
For people with more modest salaries, the compulsory 12% contribution to the fund may be burdensome and may restrict their spending capacity.
EPF is safe but not completely so. If the employer/ company has a dubious future, it may not be able to pay it’s share of the EPF. In such cases, the employee stands to lose significantly.
Withdrawals from EPF may be conditional and are available in case of emergency. In other words one cannot withdraw any amount whenever they want. Many people withdraw their entire EPF corpus when changing jobs and then it may be back to square one in terms of their savings.
It also may not be ideal for people looking to grow their wealth. The amount of earning is barely able to outstrip inflation rates. For most middle class people, it can be difficult to reach the magic Rs 1 crore mark in their EPF accounts even after working till superannuation. So while EPF can be one important component of one’s investment portfolio, ideally it should be one part of a more diversified portfolio that includes equity, mutual funds and so on. While there are pros and cons of the EPF, it is still a very viable option for employees to secure their future.
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