Top reasons you must know forgetting a low PF pension

A provident fund is an aid for employees working in the private and government section. The working of a provident fund (PF) is simple. You have to pay 10% of your income every month to the fund. Additionally, your employer will also contribute the same amount to the fund. Therefore, 20% of the basic salary is added to the PF account monthly. The money can then be used at the time of retirement.

Once the money is accumulated in the account and you have retired, you can withdraw the money as a lump sum payment or as small recurring payments. If you withdraw the amount as periodic payments, they are called a PF pension.

Every employee is given a unique account number (UAN). It is a universal number for the PF account. If you change your job, you can provide your employer with your UAN number, and the PF contribution will be deposited in the same account. Therefore, at the time of requirement, you need not close multiple accounts.

How does the PF pension work?

You must understand how PF pension works. You can receive a PF pension every month after retirement. Note that you cannot withdraw any money from this account when you are employed. However, partial withdrawal from your account is permitted for emergencies. In such situations, the withdrawal limit is calculated based on your situation.

However, in general cases, you will get a PF pension monthly. The pension you can withdraw from the PF account after retirement depends on when you joined the service. If you have contributed to the PF account before 2014, the calculation will be on prorate basis, and if you have made contributions after 2014, the regulation calculation will be followed. 

The formula for calculating PF pension is as follows:

Pension = (average or pensionable salary x total number of years of contribution)/70

For example, if you contributed for five years and nine months till 2014 with a pensionable salary of rs. 5000, your pension will be calculated as follows:

(5000X6)/70 = Rs. 428.57

On the other hand, after 2014, the pensionable salary is Rs. 15,000, and you have contributed for twelve years and four months. In this case, the pension will be as follows:

(15,000×12)/70 = Rs. 2571.43

Therefore, the total pension you will receive from your PF account every month is Rs. 3000. 

Here, the pensionable amount until 2014 is Rs. 5000 and the number of years of contribution is six years since we consider the prorate basis calculation. On the other hand, for contributions after 2014, the pensionable salary is Rs. 15,000, and the total contribution duration to the PF fund is 12 years.

What is a low PF pension?

Employees can withdraw a minimum and maximum amount from their PF account after retirement. The minimum amount you can draw is Rs 1000 per month. A low PF pension means withdrawing a lower amount from the PF fund every month instead of a higher amount. Although you can withdraw the pension in a lump sum instead of monthly payments, monthly payments are much more beneficial and easier to handle. 

Besides, you can easily withdraw a low PF pension for early retirement, ensuring you have enough funds in your PF account after you turn 60.

What are the benefits of getting a low PF pension?

Getting a low PF pension has many benefits. But, people are unaware of these. Therefore, they either opt for a higher pension or open other pension savings accounts. Here are some of the benefits of getting a low PF pension amount.

1. You will have funds for a longer duration.

First and foremost, you can save more by withdrawing a low PF pension from your PF account. Let’s consider an example. You have Rs 50,000 in your PF account. The minimum withdrawal is Rs. 1,000, and the maximum withdrawal limit is Rs. 7,500. Therefore, you can use the fund for 6 ½ to 50 months, depending on how much you withdraw. This is because when you receive Rs. 1,000, that is, the minimum amount, the total amount will last for 50 months. Therefore, you can choose a low PF pension. You can use the money for a longer duration.

2. You get tax benefits on a PF pension.

Another significant benefit of withdrawing a low PF pension is tax exemption. Tax exemption has a maximum limit of Rs 3 lakhs. Usually, when you remove a large PF pension amount or a lump sum amount, you have to pay taxes according to Section 16 of the Income Tax Act. As a result, the money you are left with is much less than you expected. On the contrary, when you withdraw a low PF pension, the taxation amount will also reduce.

3. It can help your nominees.

According to the EPS and EPF rules, your child or widow can withdraw the pension after your death. If you opt for a low PF pension, the amount left in the PF account can benefit your nominees. This will allow them to take care of immediate expenses or household expenses after your death. They can further adjust the PF pension according to their requirement.

Conclusion

PF is a beneficial tool introduced by the Indian government for employees. Contributions to a PF account are compulsory for both the employer and the employee. With these benefits of a low PF pension, you can now go through the EPS scheme details to understand more about PF contribution

if you want to read more similar articles, visit Piramal Finance. Piramal Finance provides information on personal finance, business finance, retirement, investment, and many other financial categories.