Employee Provident Fund (EPF): Features, Eligibility, Benefits, and How it works
Though investing money serves different goals for different people but most people start saving in the quest to build a safe and secure retirement nest so that they can create wealth, secure their family’s future, and have a regular income even after retirement.
While there are many financial products, the one that serves all the above purposes and many more is Employee Provident Fund or EPF.
Through this blog, we aim to simplify Employee Provident Fund and how it can contribute to your secured future.
What is EPF?
Employee Provident Fund or EPF is a government-sponsored retirement scheme that falls under the EEE (exempt- exempt- exempt) tax category. It is the main scheme under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and is governed by the Employees' Provident Fund Organisation (EPFO).
The EPF scheme is actually a conglomeration of multiple schemes that are managed by the government, which include schemes such as the Employee Pension Scheme (EPS) and the Employee Deposit Linked Insurance Scheme (EDLI).
These schemes help the salaried class build up a substantial retirement corpus by making monthly contributions during a person’s years of employment.
The fund is built with contributions extended by both the employer and the employee, who are each expected to contribute 12% of the employee’s monthly salary to it, amassing a total contribution of 24% of the monthly paycheque.
The fund thus accrues an annual pre-fixed rate of interest that is determined by the Employees Provident Fund Organisation (EPFO). A great component of this scheme is that the interest that is accrued in this scheme is tax-free (under some conditions).
A Brief History of EPF in India
The EPF schemes were launched in India in 1952 with the primary goal of safeguarding millions of employees’ interests and social security.
Contributions to EPF were made compulsory with the Employees’ Provident Funds Act proposed by the Ministry of Labour and Employment. Employees Provident Fund Organisation (EPFO) is the organization primarily responsible for the maintenance and upkeep of the EPF schemes.
EPFO is serving more than 5 crores of active EPF members.
What is the Eligibility to become a member of EPF India?
All employees serving both the Public Sector and the Private sector can become a member of the EPFO. Any companies having more than 20 employees are deemed to extend EPF facility to their employees.
Benefits of investing in Employee Provident Fund
EPF has a plethora of benefits under its sleeve, some of which are:
- Capital Appreciation- The PF scheme offers a relatively higher interest rate (8.5% for this financial year) on the deposit.
- Emergency Corpus- Under uncertain conditions, EPF funds can also be withdrawn for use in emergency purposes.
- Saving on Taxation- Up to a limit of ₹1.5 Lakh, the earnings from EPF are also exempted from taxation under section 80C of the Income Tax Act
- Retirement Corpus- Out of the 24% monthly paycheck, about 8.33% goes to the EPS, and hence creates a healthy retirement corpus.
Know how you can get secure your retirement with National Pension System
Returns on EPFs
The EPF interest rate is proposed and approved by the EPFO every financial year.
The EPF interest rate saw really high figures in the 90s when it boomed to almost 12%. Since then, it has come down to a more moderate (yet relatively high) 8.5% for the financial year 2020-2021.
How is EPF calculated?
According to the guidelines of the Employee Provident Fund Organization, 12% of the basic salary is contributed by the employee and 12% is contributed by the employer. A third of the employer’s contribution that is 3.67% goes to the Employee Provident Fund and 8.33% goes to the Employee Pension Scheme or EPS.
Let’s understand by taking an example.
Mr. X has Rs. 30,000 as basic salary plus dearness allowance(DA). Hence the Employee’s contribution towards the EPF account will be Rs. 3,600 (12% of Rs. 30000) and the Employer’s contribution will also be Rs. 3,600.
Since only 3.67% of the Employer’s contribution goes towards EPF contribution, the segregation of fund will be done like:
*Employer’s contribution towards EPS is limited to 8.33% on salary up to Rs.15,000, i.e. Rs. 1,250. If the basic salary is more than Rs. 15,00 then 8.33% of the remaining amount is contributed towards EPF as an additional contribution.
Therefore, the total contribution towards EPF is:
Note that you can increase your take-home salary by talking to the HR department as there is a provision of minimum contribution towards the PF account.
Capital Growth when you invest in EPF for long term
As in Mutual Funds, to unveil the true magic of compounding you need to remain invested in the Employee Provident Fund scheme for longer periods. The current EPF interest rate for FY 2020-21 is 8.5%.
Let’s take the cue from the above example and calculate the capital gains on EPF if invested for a long term assuming that Mr. X started his career at 25 years and is contributing Rs. 5,951 per month.
Note: EPF can be withdrawn only after attaining the retirement age of 58 years.
How to log in to your EPF account?
To log into your EPF account, you need to visit the website of EPF i.e. EPF e-SEWA/EPF Members Portal, and log in using UAN which has to be activated earlier.
What is UAN?
UAN or Universal Account Number is a 12-digit number provided to every member by the Employees’ Provided Fund Organization using which he can log into his EPF account and manage his PF funds. Using the Universal Account Number, the employee can easily withdraw and transfer funds.
Tax on EPF
Employee Provident Fund contributions and interests were completely exempt from tax until the year 2020. In Budget 2021, the government has announced that if the deposits in EPF and VPF (Voluntary Provident Fund) exceed Rs. 2.5 Lakh in a financial year, then the interest earned on the contributions above Rs. 2.5 Lakh will be taxable.
If in case no contribution is made by the employer to the EPF account, then the interest component will be tax-exempt up to the deposit of Rs. 5 Lakh in any given financial year.
What would happen to a Dormant EPF account?
There are cases when the employee is unable to contribute towards the EPF account for a long time and hence remains dormant.
In a financial reform introduced in 2011-12, the Employees’ Provided Fund Organization decided to stop paying interest on dormant accounts which were inoperative for more than 3 years or 36 months. Although this was done to discourage PF subscribers from neglecting their EPF accounts, but due to a lot of resistance it was eventually revoked from November 2016.
Hence, now even if your account is dormant for more than 3 years, it will continue to accrue interest till the member attains the age of 58 years.
EPF Withdrawal
Under only three cases, 100% of the EPF can be withdrawn from the account. They are:
- Upon attaining 58 years of age.
- If the member is unemployed for two months or more
- Due to the premature death of the member, the entire corpus can be withdrawn by the nominee.
There is a number of reasons for which a member can withdraw EPF contribution partially like medical emergency, education, marriage, purchase of land, home loan repayment, etc.
