Every employed person in India has a PF account. It is considered a kind of savings scheme that is useful in old age. But most people withdraw PF money immediately when they change jobs, whereas doing so is a big mistake. This gives you only immediate relief, but can cause big financial loss in the future. It not only eliminates your savings, but can also deprive you of many benefits like a pension and tax exemption. Let us understand why the habit of withdrawing PF is wrong and what its disadvantages can be.
The benefit of compounding is lost
Interest is received on EPF (Employees Provident Fund) every year, and this interest increases your money manifold due to compounding. Compounding means that interest is received on your principal and the interest received on it. It increases your investment rapidly. If you withdraw PF money on changing jobs repeatedly, then you lose the benefit of this compounding. For example, if someone deposited money in a PF for 10 years, but kept withdrawing money in between, then they will have very little amount left at the time of retirement.
Tax is levied on withdrawing money before 5 years
If you withdraw PF money before 5 years of continuous service, then you may have to pay tax on it. This means that the money, which could have secured your future, becomes a loss deal if withdrawn in a hurry. The interest rate on EPF for the financial year 2024-25 has been fixed at 8.25%, which is very attractive compared to other options in the market. To take full advantage of this interest rate, letting the money remain in the account for a long time is the wisest move.
Pension benefits also go hand in hand
Both the employee and the company contribute to the PF account. 12% of the employee’s salary goes to PF, and the company also deposits the same amount. Out of the company’s 12% contribution, 8.33% goes directly to the EPS (Employees’ Pension Scheme) fund, while the remaining 3.67% is deposited in the PF account. If an employee contributes to PF for 10 years and later leaves the job, he has to keep his EPS fund active to get the benefit of the pension. If he withdraws his entire PF, but leaves the money in the EPS fund, he will get a pension. But if he withdraws the entire amount from the EPS fund as well, he will not get any pension in the future.
The tax exemption benefit is affected
A big advantage of EPF is that it also helps in saving tax. If your annual EPF contribution is more than ₹ 2.5 lakh, then the interest received on the additional amount is taxed. But the interest received on contributions up to ₹ 2.5 lakh is completely tax-free. If you invest in EPF for 5 consecutive years, then there is no tax on withdrawal of money. But if your account remains inactive for 3 years (i.e., no money is deposited in it), then the interest earned on it may be taxable.