One of the crucial stages in a man’s life is the retirement stage. When a person enters the retirement stage it changes the person’s perception towards financial planning including cash flows. The regularity and quantity of savings amount will determine the total corpus a person will have during his retirement. This will also give an idea as to how much secure is his retirement money wise. Employees’ Provident Fund (EPF) is one of the traditional routes to save for retirement of a person.
In this article, we present to you certain points as to Which Is Better-PF Withdrawal or PF Transfer?
Opportunity cost – interest accumulation
Interest earned on the principal amounts of PF is compounded annually. This means, the current year’s earned interest is supplemented to the principal. In this way a person gets the benefit of interest on previous year’s earnings also. This is known as the power of compounding. When you withdraw from your EPF contributions, it prevents you from getting the compounding benefits. Therefore, it’s better to transfer your EPF account instead of withdrawing the amount, even in the case of job switch.
Impact on retirement savings
Provident funds help to build up a significant corpus for a person’s retirement. When you withdraw from your provident fund account, it deteriorates the value of your corpus greatly. In order to balance this deficit, you will have to save more in future or invest in riskier assets.
All kinds of withdrawals before five years of continuous service from a PF account are taxable. These withdrawals are subject to few exceptions which are as follows-
The sum received from the employer with the maximum interest accrued on the sum is included in the person’s salary. Therefore, this amount is taxed accordingly.
Interest accrued on a person’s own contribution towards the PF account is taxed as other set of income.
Consider the following illustration–
A person works for four years in a company. He has collected Rs. 3 lakhs as his PF account balance. The pesron’s taxable salary comes to Rs.4.5 lakhs after reducing the amount of Rs.2lakhs which is exempted from tax. According to the income tax criteria, the person must pay taxes at 10% rate. However, if he resigns and withdraws his PF account then the amount of Rs.3 lakhs will be added to his salary of Rs.4.5 lakhs. This increases the person’s tax liability as he now the person’s taxable salary is 7.5 lakhs (4.5+3). However, if there’s no tax on the transfer of his PF account then the person will have a greater corpus for his retirement and will have to pay lesser tax thus securing his retirement.
Hence, in order to lead a relaxed retirement life, one needs to prevent from withdrawals from his/her provident fund accounts. Premature withdrawal should only be considered after a critical cost benefit analysis & when there is no other option available to you.