For the average worker in India, juggling between investment plans, funds and analyzing the returns can be quite a herculean task. A simple, effective way of saving and planning for retirement is provided through the Employees Provident Fund (EPF). Although there are many options available, here is why the EPF is the best long-term savings instruments for the Indian worker.
High Interest Rate
EPF offers the Highest Interest return among other debt instruments. At the 8.8%, there is no contest for the EPF, only the Public Provident Fund (PPF) nearly matching it at an interest of 8.7%. However, the PPF bears an annual limit of Rs 1.5 lakh on investments.
Tax-free returns from the EPF
Under Section 80 (C) of the Income Tax Act, the employee contribution to a limit of Rs 1 lakh per year is subtracted from the taxable income. Additionally, the employer's contribution and Interest earned is exempt from tax. The only other similar investment instrument to EPF in terms of interest earned is the National Savings Certificate (NSC), however, interest on NSC is taxable after five years, unlike EPF. Bank deposits may offer a higher return however the income earned from bank deposits is fully taxable, resulting in post-tax returns of barely 6-6.5%.
Investment without Pain
EPF employs the perfect way to save for your long-term goals. Each contribution is deducted directly from your salary straight to the EPF account. Moreover, contributions are a percentage of your income, which means that you automatically put in a higher amount as your income goes up. You will not feel the pinch of making contribution month on month because you never touched the money. The employer can as well match that contribution or contribute a 12% of Rs 6,500
EPF is designed for long-term savings; however, a withdrawal of an account that is less than five years old will result in forfeiture of all tax benefits accorded to it. It is advisable to transfer an account and continue accumulating to ensure that you save on tax as well as not spend the corpus that is best kept for your post-retirement years.