Hidden Wealth Unveiled: How to Master EPF, Gratuity, and More

Welcome to this special edition of our newsletter, where we dive deep into the world of financial instruments such as the Employee Provident Fund (EPF), gratuity, and more. These instruments are not just about retirement savings – if you know how to unlock them, they can serve as powerful tools to meet life’s big financial milestones well before retirement.

In this edition, we explore ways to withdraw funds early, leverage these instruments for loans, and maximize the hidden potential of your hard-earned money. After reading this, you’ll have a fresh perspective on how to use these financial tools in ways you probably didn’t know were possible.

1. Employee Provident Fund (EPF): Not Just for Retirement

Did you know that your EPF isn’t just a retirement savings scheme? It can be your gateway to handling big life events like buying a house, paying for education, or even funding medical emergencies – all without disrupting your retirement plan.

How It Works

- Contributions: Both employer and employee contribute 12% of basic salary and DA to your EPF. Over time, these contributions earn compounded interest, making it one of the best tax-saving instruments.

- Interest Rates: The EPF interest rate is typically around 8%, compounded annually – far better than traditional savings accounts.

Strategic Withdrawals You Didn’t Know About

You might think EPF withdrawals are only possible after retirement, but that’s a common misconception. Here are specific scenarios where you can tap into your EPF without penalties:

- Buying a House: If you’ve been a member for at least 5 years, you can withdraw up to 90% of your EPF balance to buy or build a home. What’s great is that you can combine this with your partner’s EPF for a larger pool of funds!

- Paying for Education: You can withdraw up to 50% of your contribution for your higher education or for your children’s education. It’s an excellent alternative to taking out an education loan.

- Medical Emergencies: You don’t need to exhaust your savings. For hospitalization over a month, or surgeries like bypass or cancer treatments, EPF allows full withdrawal of your share plus interest.

Use EPF for Loan Repayment

Another little-known fact is that you can use your EPF to repay home loans. Imagine reducing your loan burden using your retirement fund without tapping into personal savings or selling investments. You can withdraw up to 36 times your monthly salary for this purpose, which can go a long way in reducing high-interest debt.

Pro Tip: Combine EPF with PPF or VPF for a larger safety net. If you need to fund a significant financial goal, tapping into both your EPF and other long-term instruments ensures that you still have robust reserves for future needs.

2. Gratuity: More Than Just a Farewell Gift

Gratuity is one of those benefits that many employees don’t fully understand, and most don’t realize how valuable it can be in non-retirement situations. Often viewed as a retirement perk, gratuity can actually play a critical role in funding life goals while you’re still employed.

Unlocking the Power of Gratuity

- How It Works: Gratuity is calculated as (Last drawn salary × Years of service × 15) / 26, and it’s paid out if you’ve worked for five or more years at your company.

Gratuity for Wealth Creation

Most people think of gratuity as a one-time payment upon leaving a company, but you can be more strategic with it:

- Paying Off High-Interest Debt: Imagine clearing off your high-interest loans using your gratuity payout. Gratuity can be used as a lump sum to get rid of personal loans, credit card balances, or any financial obligations that eat into your disposable income.

- Funding Major Life Events: Received your gratuity but don’t need it immediately? Instead of letting it sit idle, invest it in high-growth mutual funds or diversified portfolios. Even though gratuity is a one-time benefit, you can make it work for you by growing it over the years.

Pro Tip: Maximize Your Gratuity Exemption. The maximum amount of gratuity exempted from tax is ₹20 lakh. If you’re changing jobs, calculate whether your gratuity payout will reach this limit, and plan ahead to take full advantage of this exemption.

3. National Pension System (NPS): Beyond the Pension

While the NPS is traditionally thought of as a retirement tool, you can leverage it in ways that provide liquidity and loan options well before your retirement years. Here’s how you can get the most out of it.

How It Works

- The NPS allows you to invest regularly in market-linked instruments. At maturity (60 years), you can withdraw 60% tax-free, while the remaining 40% is annuitized for a steady income.

Unlock Funds Before 60

- Partial Withdrawals: You can withdraw up to 25% of your contributions for life events like marriage, home buying, or medical treatment. This is often overlooked by investors who think their NPS is completely locked up until retirement.

- Loan Collateral: Many banks and financial institutions allow you to use your NPS as collateral for loans. Instead of breaking your FDs or liquidating shares, consider leveraging your NPS for a home loan or personal loan. This keeps your long-term savings intact while providing immediate financial relief.

Pro Tip: Make use of the extra ₹50,000 tax deduction under Section 80CCD(1B) for your NPS contributions beyond the ₹1.5 lakh under Section 80C. This is often missed, but it’s a powerful tax-saving tool, especially for high earners.

4. Public Provident Fund (PPF): Not Just Long-Term Lock-In

PPF is famous for its tax benefits and long-term savings structure, but many overlook the short-term benefits it offers in terms of liquidity. While it has a 15-year lock-in period, there are ways to access this money for emergencies or significant financial goals.

How to Withdraw

- Partial Withdrawals: After the 5th year, you can withdraw up to 50% of your balance. This is incredibly useful for mid-term goals like funding your child’s education, wedding expenses, or even starting a business.

- Loan Against PPF: From the 3rd to the 6th year, you can take a loan against your PPF balance, which allows you to borrow at a lower interest rate compared to personal loans. This loan can be repaid over 36 months, and you can continue to earn interest on your remaining PPF balance.

Pro Tip: Align your PPF contributions to maximize interest. Interest on PPF is calculated on the lowest balance between the 5th and the end of each month. To maximize your returns, ensure your contributions are made before the 5th.

5. Sukanya Samriddhi Yojana (SSY): The Hidden Power of Compounding

SSY is one of the best savings schemes for securing your daughter’s future. With interest rates much higher than most other instruments and tax-free returns, it’s a tool that goes beyond just savings – it’s a wealth creator.

Using SSY for Education

One of the best-kept secrets of SSY is that you can start partial withdrawals for higher education when your daughter turns 18. Instead of taking on an education loan, you can use this corpus to fund her education without the burden of interest payments. Additionally, the 21-year maturity ensures you’ll have a substantial corpus ready for major life events like marriage.

Pro Tip: Use SSY for compounding benefits. The earlier you start, the longer the power of compounding works in your favor. By contributing the maximum allowed amount of ₹1.5 lakh annually, you’ll have a significantly larger corpus than you expect by the time your daughter reaches adulthood.

6. Maximizing Loans and Collateral with Financial Instruments

Many of these instruments allow you to take loans against them without disturbing their core balances. This is a major advantage, as you can tap into immediate liquidity while continuing to earn interest on your savings.

Loan Against EPF

Instead of withdrawing from your EPF prematurely, many financial institutions allow you to borrow against your EPF balance for purposes like home renovation or education. This keeps your savings intact while giving you the funds you need.

Loan Against PPF

PPF loans come with low-interest rates and can be used for short-term needs, from covering medical expenses to funding a personal project. This is especially useful if you don’t want to tap into high-interest loans or liquidate other investments.

Pro Tip: When considering a loan, always compare the interest rate on loans against your PPF or EPF versus personal loans. The former is often a much cheaper option, with the added benefit of leaving your savings untouched.

Conclusion: Your Money, Your Rules

Money-related instruments like EPF, gratuity, NPS, and PPF aren’t just for retirement. These powerful tools can be tapped for life’s major events – from buying a house to funding education, repaying loans, and even handling emergencies. The key lies in understanding when and how to access them without compromising your long-term financial goals.

A financial advisor will help you navigate the intricate details of these instruments to ensure that you’re making the best possible financial decisions. Whether it’s for retirement or immediate life goals, there’s always a way to unlock your wealth’s true potential.