A Comprehensive Overview of General Provident Fund (GPF)
In India, there are many mandatory and voluntary retirement-focused savings schemes available. These schemes are designed to help you save up for your post-retirement life and typically offer many benefits that are usually not available with other investment options.
Among the different schemes available, the General Provident Fund is one of the most attractive. Continue reading to learn about this retirement-focused savings scheme, its key features, eligibility criteria and more.
What Is a General Provident Fund (GPF)?
Launched in 1960, the General Provident Fund is a retirement-focused savings scheme for government employees. The primary objective of this mandatory scheme is to provide government employees with a source of income after they retire from service.
Unlike the Employees Provident Fund (EPF), the contributions toward the GPF are made only by the employee. According to the terms of the scheme, employees are required to contribute to the fund each month until they retire or resign from service.
The monthly contributions are automatically deducted from the salary of the employee and paid to the fund. Upon retirement or resignation, they may choose to withdraw the funds in the account partially or entirely and use it to take care of their expenses.
How Does the General Provident Fund (GPF) Work?
Now that you’re aware of the concept of the General Provident Fund, here’s a hypothetical example to help you understand how it works.
Let’s say that you’ve recently been inducted into government service. You’re enrolled into the General Provident Fund right from the time of induction itself. Your monthly salary is ₹65,000, and you choose to contribute 10% of your salary towards GPF, which is ₹6,500.
The amount of ₹6,500 is automatically deducted from your salary each month and deposited into your GPF account. This continues until you retire or resign from government service. The contributions you make towards the fund accrue interest at the rate specified by the government of India.
Note: Currently, the GPF interest rate is 7.1% per annum for the October to December quarter of FY 2023 – 2024.
Now, when you retire or resign from service, you can withdraw all of the contributions you’ve made towards your GPF account, including any interest that has accrued.
Key Features and Benefits of General Provident Fund (GPF)
The General Provident Fund offers several key features and benefits that make it stand out from other retirement-focused investment options. Here’s a quick overview of what they are.
Zero Risk of Default
Since GPF is administered by the Ministry of Personnel, Public Grievances and Pensions through the Department of Pension and Pensioner’s Welfare, there’s no risk of default. This makes it one of the safest long-term retirement schemes available in the country.
Variable Interest Rate
The GPF interest rate is not fixed. Instead, the government of India revises and notifies the interest rate applicable to the scheme every quarter.
Unlike other retirement investment schemes, the returns from the General Provident Fund are guaranteed and are not linked with the performance of the financial markets or any other metric.
Flexibility in Choosing the Contribution Amount
With the General Provident Fund, you get the flexibility to choose the amount of contribution you wish to make each month. According to the scheme, the minimum contribution limit is 6% of your salary, whereas the maximum contribution is 100% of your salary.
All subscribers are mandatorily required to nominate a family member at the time of joining the fund itself. The nomination can be modified later at any point in time during your service by filing an updated nomination form.
Partial Withdrawal Facility
In the case of any emergencies, you can partially withdraw funds from your account even while you’re in service, subject to certain restrictions. If you’re employed with any state government, you should check the GPF withdrawal rules for state govt. employees before placing a partial withdrawal request.
You can also avail a loan against your GPF account balance to meet certain predefined expenses such as for education, marriage, house purchase or medical emergency. The maximum amount of loan you can avail is limited to 75% of your total fund balance or 12 months of your contributions, whichever is less. However, under certain special conditions, the GPF authority may choose to allow loans of up to 90% of the total fund balance.
The loan is generally sanctioned and disbursed within 15 days from the date of placing the request and needs to be repaid within a maximum tenure of 60 months. One major advantage of this feature is that no interest is levied on the loan amount.
Additional Amount on Death of the Subscriber
In the case of the death of a GPF subscriber, an additional amount equivalent to the average balance in their account during the preceding three years is paid out to the nominee. The maximum amount under this rule is restricted to ₹60,000. That said, this benefit only applies to government employees who have crossed 5 continuous years of service.
The contributions you make toward the General Provident Fund can be claimed as a deduction under section 80C of the Income Tax Act. The maximum amount of deduction per financial year is restricted to ₹1.5 lakhs. Furthermore, the interest that accrues on your GPF contributions is also completely tax-free.
If you’re a government employee, the General Provident Fund is one of the best long-term retirement schemes currently available in India. It offers guaranteed returns with zero risk of default and even offers the ability to avail loan against your GPF balance.
Is the interest earned on investments made in the General Provident Fund taxable?
No. The interest you earn on General Provident Fund contributions is completely exempt from tax. This makes it one of the best long-term retirement savings schemes for government employees.
Can you withdraw funds from the General Provident Fund before you retire?
Yes. You can partially withdraw funds from your General Provident Fund account even before your retirement to meet emergency or unforeseen expenses.
Is the interest rate on GPF contributions fixed or does it vary?
The interest rate applicable for GPF contributions is variable. In fact, the government of India declares the interest rate every quarter. Currently, for the third quarter of the FY 2023 – 2024 (October to December), the interest rate is 7.1% per annum.
Are the contributions made to a GPF account tax-deductible?
Yes. You can claim the contributions to a GPF account made during a financial year as a deduction from the total taxable income for that year under section 80C of the Income Tax Act. The maximum amount that can be claimed per financial year is restricted to ₹1.5 lakhs.
What is the primary difference between the Public Provident Fund and the General Provident Fund?
The primary difference between these two retirement-focused investment options is that GPF is a mandatory scheme available only for government employees. In contrast, PPF is a voluntary scheme available for the general public.