Employee Provident Fund (EPF) is one of the most beneficial savings schemes for salaried employees in India. It not only ensures financial security post-retirement but also provides several other benefits, including tax exemptions and emergency funds. However, many employees are unaware of how EPF works, the benefits of making monthly contributions, and the important rules to follow before withdrawing money.
In this article, we will explore the key benefits of depositing money in EPF every month and the essential factors to consider before withdrawing funds.
What is EPF and How Does It Work?
The Employees’ Provident Fund (EPF) is a retirement savings scheme managed by the Employees’ Provident Fund Organization (EPFO). Under this scheme:
- Both the employee and employer contribute a fixed percentage of the employee’s salary (basic + dearness allowance) every month.
- The employee contributes 12% of their basic salary.
- The employer also contributes 12%, out of which 8.33% goes to the Employees’ Pension Scheme (EPS) and the remaining to EPF.
- The amount accumulates over the years with interest, which is determined by the government annually.
- Upon retirement or under specific conditions, employees can withdraw their EPF savings.
Key Benefits of Depositing Money in EPF Every Month
A. Retirement Savings with Compound Growth
EPF provides long-term financial security by accumulating savings throughout an employee’s working life. The power of compounding interest significantly increases the savings amount over time.
For example:
- If an employee earns ₹30,000 per month and contributes 12% (₹3,600), and the employer contributes ₹3,600, the total monthly contribution will be ₹7,200.
- Over 20-30 years, this amount, along with annual interest, results in a large retirement corpus.
B. Tax Benefits Under Section 80C
- EPF contributions qualify for tax deduction under Section 80C of the Income Tax Act.
- The interest earned and the maturity amount are tax-free, making EPF one of the best tax-saving investment options.
- Withdrawals after 5 years of continuous service are completely exempt from tax.
C. Financial Backup in Emergencies
EPF allows employees to withdraw money in cases of financial emergencies such as:
- Medical emergencies (for self or family members)
- Education expenses
- Home purchase or renovation
- Marriage expenses
These withdrawals come with specific conditions, ensuring that EPF remains a long-term saving tool rather than a regular withdrawal account.
D. Pension Benefits (EPS Contribution)
- Part of the employer’s contribution goes into Employees’ Pension Scheme (EPS).
- After 10 years of service, employees become eligible for a monthly pension post-retirement, ensuring financial stability.
E. Higher Interest Rate Than Savings Accounts
- The interest rate on EPF is usually higher than regular savings accounts and Fixed Deposits (FDs), making it a better long-term investment.
- EPF offers an interest rate of around 8% or more, while normal bank deposits provide lower returns.
F. Life Insurance Coverage (EDLI Scheme)
- EPF members are automatically covered under the Employees’ Deposit Linked Insurance (EDLI) Scheme.
- In case of an employee’s untimely demise, the nominee receives a lump sum amount.
- The maximum insurance benefit under EDLI can go up to ₹7 lakh.
G. Protection Against Bankruptcy
Unlike other savings and investment schemes, EPF funds cannot be seized in case of financial distress, lawsuits, or bankruptcy, making it a secure investment option.
Things to Consider Before Withdrawing EPF Money
While EPF withdrawals are allowed under certain conditions, it’s crucial to consider the following points:
A. Full Withdrawal is Only Allowed in Limited Cases
- Full withdrawal is permitted only when:
- The employee retires at the age of 58 years.
- The employee has been unemployed for more than 2 months.
- Partial withdrawals are allowed under specific conditions such as medical emergencies, education, marriage, or home purchase.
B. Tax Implications on Early Withdrawals
- If an employee withdraws EPF before completing 5 years of service, the amount becomes taxable.
- Withdrawals after 5 years of continuous service are completely tax-free.
C. Loss of Pension Benefits on Withdrawal
- Withdrawing EPF before 10 years of service leads to a loss of pension benefits from the Employees’ Pension Scheme (EPS).
- Employees are advised to transfer their EPF when switching jobs instead of withdrawing it.
D. Interest Earnings Stop After 3 Years of Inactivity
- If no contributions are made for 3 consecutive years, EPF accounts become inactive.
- Though the money remains safe, no further interest is credited after the 3-year period.
E. Online Withdrawal Process for Easy Access
Employees can easily withdraw EPF online through the UMANG App or EPFO portal by linking their UAN (Universal Account Number) to their Aadhaar and bank account.
When Should You Withdraw EPF?
EPF should ideally be used as a retirement savings tool, but in unavoidable situations, partial withdrawals can help. Consider withdrawing only if:
- You are facing a major financial crisis.
- You need funds for medical emergencies.
- You are purchasing a house.
- You are retiring or unemployed for more than 2 months.
Otherwise, keeping EPF deposits intact ensures long-term financial security and a stable retirement life.
Final Thoughts
EPF is not just a mandatory savings scheme, but a financial safety net that provides security, tax benefits, and high returns over time. By understanding its benefits and withdrawal rules, employees can make better financial decisions and maximize their savings for a secure future.
