What is Provident Fund?

A PF account helps you build wealth through small contributions every month over a long time.
 

There is no perfect formula for a peaceful retired life, but a stable bank balance can help. It can impart peace of mind and allow you to live your retirement life the way you want to. A retirement fund is essential to building a bank balance, but which method should you choose? A provident fund is often the go-to option for investors as it provides a safe place to park your money. Let's learn what a provident fund is and see why it is highly beneficial.

What is Provident Fund?

Provide fund (PF) is a retirement corpus building scheme backed by the Indian Government. PF is mandatory for most employees in India. You can build a sizable corpus through PF by putting aside a small portion of your salary every month.

What is Provident Fund in salary?

An employee contributes 12% of their basic salary to their PF accounts every month. If your basic salary is ₹20,000, you will contribute at least ₹1600 towards PF. Some employers give the employee the option to notch their PF contribution up if they wish to save more.

But with the pension schemes available today, why is PF mandatory and the most popular? Let's take a look.

1. Employer contribution

Unlike other pension schemes, your employer contributes monthly to your PF account. It is mandated by law and helps build your fund faster. This contribution is often at least 10% of your basic salary.

2. Capital appreciation

Your PF account balance never stays idle. Instead, it accrues returns from interest continuously. The interest depends on the Central Government's budget decisions. This could be changed to account for inflation and other economic situations.

3. Compounding

The power of compounding can help you create wealth. The interest you earn each year is invested back into your PF. The compounded amount accrues interest from the following year.

For instance, let us assume your PF balance at the end of the first year is ₹50,000 and the interest accrued throughout that year amounts to ₹2000. Interest is earned from the following year for the compounded amount of ₹52,000 and not ₹50,000. It can significantly increase your capital in the long term.

4. Less liquidity

While less liquidity is often a negative trait for most investments, it can benefit PF investments. Since PF is a retirement scheme, it is wise to leave it untouched. But that doesn't mean you cannot liquefy your money before maturity. There are certain situations where PF money can be withdrawn. But it is recommended not to withdraw from your PF unless the need is that dire.

Instead, you can take a personal loan. IDFC FIRST Bank's personal loans offer the most competitive interest rates and flexible tenures. Furthermore, getting one is easy as the process is entirely online and seamless.

5. Tax-saving

Your PF contribution is eligible for tax deductions. According to Section 80C of the Income Tax Act, contributions to PF are tax-deductible for up to ₹1.5 lakh.

6. Risk-free

PF investments are not market-linked, which means an economic slowdown or stock market downturn cannot hamper your investments. Many people are attracted to this PF feature as they believe a retirement corpus should remain free of economic risks. However, at the same time, the apparent downside of PF is that the interest earned could be less than the returns a stock market or market-linked investment could give.

A healthy PF balance is vital for a financially peaceful retirement life. Keeping your withdrawals at a minimum and increasing the contribution can go a long way in helping your corpus grow.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.