Withdrawing the amount each time you move to a new job can make a huge dent in the retirement corpus.
When Amit Jain, 30, a software professional, shared his plans to change job with his parents, his father quickly reminded him to transfer his employee provident fund (EPF) account to the new employer. “My father said that this corpus was meant to take care of my retirement needs,” Jain said.
Jain, who was planning to withdraw this corpus and use it as down-payment for his new car, was initially not convinced. But, his father reasoned that it was better to let this amount compound overtime instead of withdrawing it.
Jain had a practical reason for withdrawing as well. While withdrawing the money takes around three to six months, one could face problems while transferring the account. Applications get misplaced, are difficult to follow up with human resource executives in the previous company (being an ex-employee does not help either) are some of the common problems.
However, financial planners say despite these problems, one should transfer the money. “EPF forms the debt part of your portfolio and no other debt instrument gives 8.5 per cent,” said Gaurav Mashruwala, a certified financial planner.
Withdrawing after each job can reduce the corpus significantly. Whereas continuing with it can help earn a good amount on retirement. Let’s see how.
Considering Jain started working in 2002, when he was 22, his monthly salary was Rs 12,000. He paid Rs 750 towards EPF every month. At 60, he will have worked for 38 years. To do the analysis, one needs to make some basic assumptions:
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Based on these assumptions, the total corpus at the end of his tenure at each organisation would be as depicted in the table.
| THE KITTY Years worked- EPF | |
| 2002-06 = | Rs 1.27 lakh |
| 2007-11 = | Rs 2.43 lakh |
| 2012-16 = | Rs 4.63 lakh |
| 2017-21 = | Rs 8.81 lakh |
| 2022-26 = | Rs 16.77 lakh |
| 2027-31 = | Rs 31.92 lakh |
| 2032-36 = | Rs 60.76 lakh |
| 2037-40 = | Rs 1.09 crore |
Now, if Jain were to withdraw this money each time he changed job, his final EPF corpus would be Rs 1.09 crore – the amount accumulated in the last few years. However, if Jain were to transfer his EPF corpus each time while shifting job, at the time of retirement and after 38 years of service, he will get a sum of Rs 3.56 crore – Rs 2.47 crore higher. Partial withdrawals total Rs 2.27 crore – Rs 1.29 crore less.
And, there is the tax angle as well. Each time you withdraw this amount, it will be taxed (if you have left the company in less than five years). The EPF amount will be added to your salary income and taxed accordingly. On the other hand, if left untouched, it is completely tax-free.
According to our example, Jain would be taxed on the corpus he receives in his last job, because he has worked less than five years in the company.
Financial planners suggest even if one withdraws the money, it should always be invested properly instead of using it to meet expenses. Sumeet Vaid, founder, Freedom Financial Planner, said, “If he invested the amount he withdrew each time in a debt-equity ratio of 20:80 in mutual funds, assuming a debt return of 8 per cent and equity return of 15 per cent, his final corpus would be Rs 5.83 crore.”
The equity portion will be completely tax-free because the long-term capital gains tax on equity is zero. The debt portion will get taxed at the rate of 10 per cent (with indexation) or 20 per cent (without indexation).
There are other options as well. Someone below the age of 30 could look at 100 per cent equity investments. And, as one grows older, the amount could be invested more in debt. “Whether to continue the EPF corpus or not depends on your age and goal. Those who have just started working and want to withdraw for investment can look at equities. But, ones closing on retirement and 10-15 years away from it, should continue the account,” added Mashruwala.
Importantly, if you are doing it on your own and there is high exposure to equity, move the money to debt in the last few years. This will help protect the corpus from stock market uncertainties.