6 Things you must do with your EPF to secure your future

Date : 17/09/2020
Read: 7 mins

Consider these investment opportunities for the corpus that will be realised from your Employee Provident Fund (EPF)

X Things you must do with your EPF to secure your future

Financial planning does not exactly figure on most people’s favourite list of topics. And when it comes to planning for life after retirement, somehow it always seems like it’s too early to think about the twilight years. However, instead of shrugging off long-term future planning, you can ensure a secure life after retirement by doing some smart preparations right away.

EPF to your rescue

Retirement isn’t cheap. Financial planners will tell you that you’ll need anything from two-thirds to 80% of your final salary as your post-retirement income to maintain your existing standard of living. Of course, you might have a nest egg ready – one whose performance and value you have been tracking closely. But have you stopped to consider investment opportunities for the corpus that will be realised from your Employee Provident Fund (EPF)?

The EPF has been designed as a long-term investment tool that provides guaranteed returns to take care of your basic survival needs after retirement.

Every month, employees contribute 12% of their basic pay + Dearness Allowance (DA) to the EPF, while the employer matches the contribution with 8.33% towards the employees’ pension scheme and 3.67% towards the EPF. Additionally, the employer pays 0.5% towards Employees Deposit Linked Insurance scheme (EDLI), 0.01% towards EDLI handling fees, and 0.65% towards EPF administrative charges.

Benefits of EPF

You start with a small amount, and over the course of your working life – with the power of compounding – you end up with a sizeable corpus on retirement.
Not only does the contribution towards EPF count as a deduction under section 80C, the interest income and withdrawal (after 5 years of service) is tax exempt.
The yield on EPF is higher than most traditional fixed income instruments.
Post retirement you will be eligible for pension (age 58 and above).
With EDLI, you are covered under the organisation’s group insurance scheme.
You have the option of making partial withdrawals from the fund (subject to certain conditions).
EPF is tax-free and the rewards on maturity are an added advantage.

However, unless really squeezed for money, one should not withdraw from the EPF, especially when between jobs. The EPF could serve as your primary retirement vehicle and unnecessary withdrawals might leave you with inadequate fuel to see you through your post-retirement journey.

Withdrawal rules for EPF

Partial withdrawals are allowed in the following cases:

Marriage (subject to completion of 7 years of service): for self or a family member, up to 50% of the employees contribution can be withdrawn
Education (subject to completion of 7 years of service): self or children after class 10, up to 50% of the employee’s contribution can be withdrawn
Purchase of land or construction of a house (subject to completion of 5 years of service): up to 24 times the monthly wages + DA (for land) and 36 times the monthly wages + DA (for a house) can be withdrawn
Home loan repayment (subject to completion of 10 years of service): up to 90% of both employer’s and employee’s contribution can be withdrawn
Home renovation (subject to completion of 5 years of service): up to 12 times the monthly salary can be withdrawn
Medical emergency (no service limit): for self or a family member, up to 6 months’ basic salary + DA or employee’s contribution + accrued interest, whichever is lower

How to keep your golden years golden

In their quest for safety, too many people make the cardinal error of either focusing only on the absolute safety of their capital or putting all their eggs in one basket. However, such instruments are likely to generate low returns and be tax-inefficient as well. For retirees, there are three prime considerations:

Keeping the corpus safe
Having a consitent stream of income
Minimising your tax liability

Most retirees find it challenging to build a retirement portfolio that has a mix of market-linked and fixed income investments. By diversifying your portfolio, you decrease the risk of all your investments suffering from the same negative market forces at the same time. Smarter investors will invest in assets that hedge against each other in the same economic and market conditions.

A good general rule-of-the-thumb is to have the same percentage of your corpus as your age invested in fixed income, and have the balance devoted to market-linked instruments. So if you are 60, then 60% of your corpus should be directed towards debt or fixed-income securities and the remaining should be in equity-led investments.

Related: How to check your EPF Balance

Options for investing your EPF

At the statutory age of retirement (58), you can withdraw the entire contribution – yours plus your employer’s – along with the interest earned, free of tax. On withdrawal of this amount, instead of investing it all in a fixed deposit or some other low-risk/ low-yield investment, you should have a plan in place to deploy the money towards additional financial security for you and your spouse.

These are savings instruments utilised by millions across the country and are generally considered to be “safe as houses”, though the returns are relatively low, have tax implications, or come attached with stringent conditions. As mentioned earlier, any investments in these should be included in the fixed-income portion of your investment portfolio.

If the fixed-income portion of your non EPF savings is at 60%, it may be beneficial to invest a major part of your EPF money in any of the following market-led products:

Equities: Generally, these are considered high-risk investments as they fluctuate with market sentiments. However, equities also provide earnings in the form of capital appreciation and dividend payments.
Mutual Funds: Investing a portion of your EPF money in mutual funds should be a crucial part of your strategy. Depending on your risk profile, you could split the investment amount between balanced funds and large-cap, along with monthly income plans (MIPs). On retirement, staying away from thematic, sectoral, and mid- and small-cap funds will serve you better. Your aim should be to generate steady returns, rather than focus on high but volatile returns.
Debt Funds: The main advantage of these funds over bank deposits is the taxation, especially if you’re in the highest tax bracket. Interest on bank deposits are fully taxable; on the other hand, income from debt funds are taxed at 20% after indexation, irrespective of your tax bracket, if they are held for three years and more.
Property: This is an option, but only if you already own your primary residence. The investment can be in a house or some form of commercial property from which you can earn a rental income. However, as we all know, it is one of the least liquid forms of investment, and its value can plummet if the economy is struggling. At present, rental incomes are also relatively low when compared with the investment required upfront.

We invest to protect ourselves against the negative effects of inflation, to ensure a legacy for our children, and to ensure there is money available to cover medical or other emergencies. As we edge closer to retirement, our savings become even more sacred. Therefore, it is only natural to want to avoid unnecessary risk.

A good parallel is a variety offered at a dinner buffet. There are dishes you’d love to eat but aren’t good for you. There are others you get enough of at home, or just don’t like. So, rather than dive in at random, you check the options that give you the most satisfaction and have your fill of those.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.