Career Journal: About to Quit? Don’t Forget Your Provident Fund

Moving jobs? Don’t forget about the money in your provident fund account. Human resources executives say that when employees leave, they often withdraw their provident fund money, or sometimes they ignore it altogether. Others delay transferring it to their new employer in order to avoid the hassles involved.

These routes can be harmful. By delaying a transfer, you can potentially lose interest on your savings. By withdrawing too early, you could hurt your financial future.

“The idea of enabling a provident fund is to let a person live comfortably after retirement,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories in Mumbai. If you retire at 55 but live till you are 85, the provident fund money will play a crucial part in helping you pay your bills over those 30 years. It could be the difference between a happy or a miserable retirement.

The Indian government requires all organizations with 20 or more employees to set up provident fund accounts for every member of staff. Both the company and employee contribute a certain percentage of the employee’s salary to the fund, and the money earns an interest fixed by the government. This year, it has been fixed at 9.5%.

That’s a hefty sum of money to ignore. Here’s a look at the options for your provident fund if or when you move jobs:

Should you withdraw?

Young employees or those who are leaving the workforce to become self-employed or turn entrepreneurs tend to withdraw their money.

“About 50% [of our] employees withdraw their provident fund while only 10% transfer it and the rest simply forget about it,” says Dayanand Allapur, head of human resources at Tesco Hindustan Service Center, a unit of U.K. retailer Tesco Plc. “This is the casual approach or the indifference to the benefits,” he says.

Some employees withdraw thinking that they will invest the money in some other form. “But they end up consuming it,” says Sumeet Vaid, founder of Freedom Wealth Solutions Pvt. in Mumbai.

That’s a bad idea. If you withdraw the money before completing five years of continuous service with a company, you’ll have to pay income tax on a large part of it. Depending on your overall income, the tax rate could be as high as 30%.

Withdrawing also means you lose other benefits, such as the possibility of using the money for major expenditures like buying a house or paying for your child’s wedding.

So, financial experts suggest withdrawals only in extreme cases.

You can apply to withdraw your provident fund money only after 60 days of leaving the company. The process is straightforward — ask the human resources executives for a withdrawal application form, in which you have to give details of the bank account where you want the money transferred. The money should reach your bank account within 60 to 90 days.

People going freelance or starting their own business should consider reinvesting the money in other long-term saving vehicles like the public provident fund or the New Pension Scheme, say advisers.

Transferring the money

Since your money grows tax-free as long as it stays in a provident fund account, you’re best off transferring it into the provident fund set up by your new employer.

Start the process as soon as possible, because if your money is still with your previous employer after three years of your departure, you won’t earn any interest on it. That’s an opportunity lost for you.

Also, delaying a transfer can add to your hassles. For instance, if you didn’t transfer money from a company where you worked several years ago, you might have to now deal with a new set of human resources executives there. What’s the chance that they’ll be helpful to you?

If your previous company has shut down, you would have to go to the government’s Employees’ Provident Fund Organization’s office.

To avoid such bother, it’s better to transfer accounts “as you move along,” says Charu Dewan, head of human resources at LeasePlan India Pvt., a vehicle leasing company.

To transfer your provident fund, approach your new company’s human resources team.  They will give you a transfer application form, Form-13, in which you’ll have to enter your previous provident fund account number, plus the dates of joining and leaving your previous company.

If you have several provident fund accounts from different employers, you’ll have to fill different forms for a transfer from each company.

Ideally, it should take less than six months for the money to be transferred. But sometimes previous employers sit on the transfer application, especially if you didn’t quit the right way.

In that case, be prepared to pester your previous employer by regularly checking up on the progress of your application.

You can also track of the status of your application on the website of the Employees’ Provident Fund Organization here.

(Source: The Wall Street Journal)

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