Provident Fund(PF) is akin to a Contributory Social Security Scheme mandated by the Government for employees, both in private and public sector. PF is governed by The Employees Provident and Miscellaneous Provisions Act 1952.
The employer is obliged to contribute 12% of wages, up to a specified limit, and the employee makes the same or even more.
Investment or saving schemes go through three stages of tax treatment. At the time of investment: when the amount may save taxes, during currency of the investment: when the interest accrual may be taxed and at the closure stage: plausibly as long-term capital gains. PF is one of those rare schemes which is not taxed at any of these stages, i.e. Exempt-Exempt-Exempt(EEE). Even withdrawals are not taxed, but withdrawal from PF is not a good idea. Maximising employee contribution is highly desirable to fully exploit the benefit of compounding.
The employee contribution to the scheme is covered by 80C provisions. The compounded interest amount is protected from taxation. The fund is also not subject to taxation at the closure stage. Which brings us to the point: what best can be done the PF amount. PF for salaried employees exists somewhat at a subconscious level.
Taxation concerns of PF accruals generally emerges at the time of retirement. Retirement is a truth that salaried employees must face in due course of time. This is the stage when PF gets monetised. Competing with PF are other funds like Gratuity, Commutation accruals, leave encashment etc all of which cumulate to a substantial amount. Awareness of investment schemes at this stage is therefore highly desirable.
Senior Citizen Savings Scheme 1984
This is the scheme of choice for parking Superannuation funds. It is offered by Post Offices, who do not deduct TDS, and over 25 Banks both nationalised and private. It offered 9% interest rate till the current government recently brought it down to 8.3%, obviously earning the ire of our elders. It offers a stream of interest payments and the principle at maturity.
It is an Exempt-Tax-Exempt(ETE) scheme since the interest is taxable.Rs15 lakhs is the maximum limit but one may subscribe multiple schemes. The tenure of the scheme is Five years extendable to Ten. Though normally applicable for those above 60 years of age, Government servants and those granted such status are eligible, even before 60 to deposit superannuation earnings in these schemes.
This is to cater for soldiers and other service personnel who are retired well before 60 years due to service conditions. This scheme is highly attractive for those who want to augment their pension with an income stream. But for the benefit of compounding, which obviously cannot coexist with a payment stream, the scheme is one of the best of its kind.
Term Deposits and NSC
Augmenting pension with additional payment stream could lead to a piquant situation where one lands up saving from your savings. Clearly a suboptimal personal finance solution. In this case it is desirable to go in for a long-term solution that offers the benefit of compounding and security. Term deposits(TTE) and NSC(TEE) are options.
Tax Free Equity Linked Saving Schemes
Tax Free ELSS share common features with Term deposits and are meant for those seeking better returns and have a propensity for risk. These schemes are generally TET schemes.
Post seventh pay commission, it is likely that the aforementioned options only partially serve the purpose. The booming Indian free market economy, ever starved for investment, offers a veritable array of choices. Mutual Funds, SIPs, ULIPs, Share trading and so on. All are game for those with the aptitude and attitude to participate in this great Indian financial market.
Provident Fund maturity benefits are not subject to taxation. To fully exploit this advantage, PF accruals should be carefully migrated to other investment avenues. Available options all have typical features.
Selecting one or a combination depends on available funds, commitments, future needs, propensity for risk etc, which is typical to each individual. No one size fits all. It is therefore imperative that the options be well understood especially when dealing with something as important as superannuation funds.