Provident funds in India: A simple guide for long term savings
When it comes to planning for retirement or building long-term savings, majority of people feel overwhelmed. The good news? Provident funds provide a simple, reliable way to build a financial buffer for the future. Whether you are a salaried employee or self employed, there is a provident fund option for you. In this post, we will break it down in simple terms so you understand how it all works.
What is a Provident Fund?
A provident fund is a basic retirement savings scheme where both you and your employer (in most cases) contribute money regularly during your working years. This money grows over time and is handed over to you as a lump sum when you retire or meet certain conditions. Think of it like a forced savings plan, with tax benefits and decent interest rates.
There are three main types of provident funds:
- Employees’ provident fund (EPF)
- Voluntary provident fund (VPF)
- Public provident fund (PPF)
Let’s look at each of them more closely..,
Employees provident fund (EPF)
How It Works
If you’re working in a company that has more than 20 employees, you’re likely already enrolled in EPF. Here’s how it works:
- You contribute 12% of your basic salary + dearness allowance every month.
- Your employer matches your contribution (although a portion goes to the pension scheme).
- This money goes to the Employees’ Provident Fund Organisation (EPFO), a government-run body.
The EPF earns interest annually, currently around 8.5% (as per the latest update). While the rate changes yearly, it’s generally higher than what you’d get in a regular savings account.
Can You Withdraw It?
Yes, but with conditions:
- You can withdraw 90% of your EPF balance at age 54.
- Partial withdrawals are allowed for things like medical emergencies, home loans, marriage, or unemployment, but you need to meet specific criteria.
Tax Benefits
- Contributions to EPF eligible for deductions under Section 80C [up to ₹1.5 lakh per year].
- If you stay employed for at least 5 years, the money you withdraw is tax-free.
Who Should Consider EPF?
Perfect for salaried employees, especially those working in the organized sector. For government employees, it’s mandatory.
Voluntary Provident Fund (VPF)
What’s the Difference?
The Voluntary Provident Fund is exactly what it sounds like — voluntary. You can contribute more than 12% of your salary to your PF account under this scheme.
- Your employer is not required to match the extra contribution.
- The interest rate and tax benefits are same as EPF.
Why it’s a smart move
If you want risk free, tax saving returns and have already maxed out other options like PPF or ELSS, then VPF is a great way to improve your retirement savings.
Public provident fund [PPF]
Tailored for Everyone
Unlike EPF and VPF, the Public provident fund is available to everyone, salaried or self employed.
- You can open a PPF account at any bank or post office.
- It comes with a 15 year lock in period.
- The current interest rate is near to 7.1%, reviewed quarterly by the government.
Key highlights
- Minimum investment:500/year
- Maximum:1.5 lakh/year
- Tax benefits under Section 80C
- Interest earned is completely tax free
PPF vs EPF: Which is Better?
- EPF usually offers a higher interest rate but is restricted to salaried employees.
- PPF is ideal for those who are self employed, freelancers or entrepreneurs.
Why You Should Care About Provident Funds
Still wondering why you should bother with these schemes? Here are some reasons:
- Disciplined savings, automatic deductions leads to consistent savings
- Tax savings upto 1.5 lakh deduction under section 80C
- Safe and secure with government backed & also low risk
- Good returns which are better than regular FDs or savings accounts
Combining provident fund savings along with investments options like mutual funds, NPS or SIP’s gives you the best of two worlds safety and growth.
Final thoughts
Provident funds are one of the best ways to build capital for your retirement. Whether you are just begin your career or in 30s, it is never too late to start saving. Even little monthly contributions can add up over time, thanks to the power of compounding.
So take some time look at your income and consider how much you can contribute to EPF, VPF or PPF. A little planning today can lead to a worry free tomorrow.
FAQs: What People Ask on Google
EPF generally offers higher returns, but it’s only for salaried employees. PPF is open to all and provides more flexibility.
Yes, you can invest in both to diversify your long term savings.
You can move your EPF balance to your new employer’s account via the EPFO portal.
No. Both the contribution and the interest earned on PPF are completely tax-free.
It as some restrictions, partial withdrawals are allowed after 7 years, but the full amount can be withdrawn only after maturity.
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