There are many investment options available which will enable one to ensure that financial security post retirement is maintained. If one invests in these regularly from the time he/she is earning, a good kitty would be available to take care of expenses in the years post retirement.
Employee Provident Fund (EPF) – It is mandatory to contribute 12% of the Basic wage, Dearness Allowance, and cash value of food allowances to the EPF account for employees of establishments having more than 20 employees in certain industries. The employer contributes 12% as well which is divided into EPF and Employee Pension Scheme (EPS). The EPF interest rate is decided by the central government along with a Central Board of trustees. For some time now, the interest rate has been around 8%-9 % of the balance maintained in the fund. An employee can start receiving the pension under EPS only after being in a minimum service period of 10 years and attaining the age of 58/50 years. However, no pension is payable before the age of 50 years and early pension after 50 years but before the age of 58 years is subject to a discount factor which is about 4% (w.e.f. 26.09.2008) for every year falling short of 58 years. These conditions are null and void in case of death / disablement.
On switching jobs, an employee can apply for transfer of money from the EPF account through a form which is filled by the employee and attested by the designated authority at the employer. When an employee withdraws the money from EPF account when changing a job, it will be treated as salary and there will be tax implications.
The EPF is a safe investment option which forces an individual to save and thus bring some discipline in financial matters.
Other options are Voluntary EPF, PPF and NPS.
In case of Voluntary Provident Fund (VPF), the employee can choose to increase his/her contribution to the employee provident fund account over and above the 12% that is mandatory. This amount will earn the same rate as the normal contribution. This excess amount is also exempt from tax but will be considered as part of the investments under section 80C.
Public Provident Fund (PPF) is a investing and tax saving tool in which a person can deposit money. The minimum investment amount is Rs. 500 and the maximum is Rs. 100,000. The PPF account can be opened with a nationalized bank or post office. It is also considered as part of the investments under section 80C.
The advantage VPF has over PPF is ease of use as one need not go to the bank or post office to invest for VPF. One just needs to give instructions to the employer. Moreover there is no upper limit on the contribution amount. There are some drawbacks like the rates can change every year. The contribution cannot be changed once it is set for a year.
The National Pension Scheme (NPS) is a pension based system introduced by the government of India under which people can invest in any of three types of investment schemes. The subscriber gets the entire sum when he/she becomes 70 years old. There are some rules regarding withdrawal before that in terms of buying a life annuity from an IRDA life insurer. For more details on NPS, please click here to read our earlier article.