Employees Provident Fund

What Is EPF? | Employees Provident Fund | 1 Best safest saving scheme for retirement

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Retirement

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Blog Introduction

Hello Friends, Welcome to my Blog Investinfy.com the best financial blogs where you will be able to read about the end to end information on many investment schemes and financial topics. In this Blog post we will be focusing on Employees Provident Fund.

Generally when we want to invest money on any investment scheme , we always asks our friends and relatives that where we can invest ? and they suggests the investment schemes which they like most. Then we invest as per their suggestions, that is good as we consider them as our well wisher , But here I want to mention one thing, if we know end to end information of each investment schemes at least it will help us to understand if that investment scheme is good for us or not.

Hence it is better to have a complete idea about each investment scheme where we invest. Therefor this blog will help you to know end to end information of many Indian investment schemes available right Infront of you.

In this blog post I will be explaining my analysis on Employees Provident Fund. This will be a complete guide on Employees Provident Fund. Please read till end of the blog post to know the complete information about this Employees Provident Fund. Lets get started.

What Is EPF?

EPF stands for Employees Provident Fund. EPF is a retirement and social security scheme for the salaried employees. EPF is a “Defined Benefits” based retirement scheme in which a fraction of Employee’s salary will be contributed to his EPF account. Also, his employer will co-contribute the equal amount for the social security of the employee.

Employees Provident Fund History

EPF was started by EPFO (Employees Provident Fund Organisation) back in 1952. At that time, EPF was the only scheme for salaried class people to save for their retirement life.

Objectives Of Employees Provident Fund

The main aim of EPF is

  • To help salaried employees to save for their retirement life.
  • To provide monthly pension throughout employee’s retirement life

How Does Employees Provident Fund Work?

  • EPF account will be opened for you by your Employer when you join an Organisation.
  • 12% of your monthly Basic Pay + DA salary will be deducted and contributed to your EPF account every month by your employer.
  • Your employer will make equal 12% contributions into your EPF account every month.
  • Your contribution and your employer’s contribution will earn interest as per the interest rate (%) announced by the Government of India from time to time.
  • At retirement, you can withdraw the entire (100%) accumulated amount from your EPF account.
  • After retirement, you will receive monthly pension from EPFO throughout your life.
  • After your death, the monthly pension will be given to your spouse followed by 2 children up to their 25 years of age.

Features Of Employees Provident Fund

  • Retirement scheme for salaried employees.
  • Backed by the Government of India.
  • Safe and Guaranteed returns
  • Income tax benefits
  • Equal contribution from employer
  • Monthly pension after retirement
  • Partial withdrawal facility for important life events

How Will Your Employees Provident Fund Contribution Above Rs. 2.5 Lakhs Be Taxed?

  • From 01-Apr-2021 onwards, if an employee contributes more than Rs. 2.5 lakhs in a financial year, then any interest earned on the excess amount will be taxed.
  • It includes employee’s contributions of both EPF and VPF. It doesn’t include any of Employer’s contributions.
  • The Government has given the clarity about how your EPF contributions will be taxed.

From FY 2021-22 onwards, your EPF account will have 2 sub-accounts. They are

Non Taxable Contribution Account : This account will include the following items. closing balance in your EPF account as on 31-Mar-2021. Any amount (which is less than Rs. 2.5 lakhs) that you contribute every financial year. any interest earned on the above two items. Any interest earned from this “Non Taxble” account is tax free.

Taxable Contribution Account : This account will include the following items. Any amount above Rs. 2.5 lakhs that you contribute in a financial year from 01-Apr-2021 onwards. Any interest earned on the above item.

Any interest earned from this “Taxble” account is taxable. The interest amount will need to be declared under “Income from Other sources” and you need to pay tax as per your income tax slab. The statement that you’ll receive from the EPFO will have the “taxable” and “non-taxable” portions of the interest.

Example: Let us assume that you are going to contribute Rs. 3 lakhs into your EPF in the FY 2021-22. The interest earned up to Rs. 2.5 lakhs will be tax free. The interest earned on the remaining amount of Rs. 50,000 will be taxed as per your income tax slab rates.

What Is EPFO ?

EPFO stands for Employees Provident Fund Organisation. EPFO is a body of the Indian Government. EPFO governs the operations of the EPF scheme.

Components Of Employees Provident Fund

EPF account contains the following components.

  • EPF (Employee Provident Fund).
  • EPS (Employee Pension Scheme).
  • EDLIS (Employees Deposit Linked Insurance Scheme).

When the employer opens EPF account, the employee is automatically enrolled for EPF, EPS and EDLIS. There is no separate process for joining EPS or EDLIS.

Employees Provident Fund Contribution Limits

Contribution Limit for Employee:

  • Employee will contribute 12% of Basic Pay + DA every month and it will go towards EPF account.
  • For the purpose of calculation, a maximum of Rs. 15,000/- will be considered for monthly Basic Pay + DA even if the employee is earning more than that.
  • That is, Rs. 1,800/- (12% of Rs. 15,000/-) is the maximum monthly contribution limit for employees.
  • This is the calculation method followed by most of the Employers and EPFO Offices.
  • But, there are Employers who don’t have such limits on contributions. Please check with your Employer to know your contribution limits.

Contribution Limit for Employer:

  • Employer will make equal 12% contribution towards employee’s EPF account.
  • But, only 8.33% will go towards EPS (Employee Pension Scheme) account.
  • The remaining 3.67% will go towards EPF account.
  • For the purpose of calculation, a maximum of Rs. 15,000/- will be considered for monthly Basic Pay + DA even if the employee is earning more than that.
  • That is, Rs. 1,250/- (8.33% of Rs. 15,000/-) is the maximum monthly contribution amount towards EPS account.
  • The remaining amount (Employee’s contribution minus EPS contribution) will be the employer’s share towards EPF account.

Employees Provident Fund Account

  • It is the account to which the employee contributes 12% of Basic Pay + DA every month.
  • It is the account to which the employer contributes 3.67% of Basic Pay + DA every month.
  • Both employee and employer contributions will earn interest as per the interest rate announced by the Government from time to time.
  • This scheme earns yearly compounded interest.
  • It means interest on contributions will be calculated every month in a financial year (from April to March) and it gets credited to the account in April of next financial year.
  • Employee can withdraw the entire (100%) accumulated amount at retirement.

EPS Account

  • The purpose of this account is to provide monthly pension to the employee after retirement.
  • It is the account to which the employer contributes 8.33% of Basic Pay + DA every month.
  • However, it is restricted to a maximum of Rs. 1,250/- per month (that is 8.33% of Rs. 15,000/-). This change is effective from 01-Sep-2014.
  • Employee does not contribute any amount towards this scheme.
  • The Government of India contributes 1.17% of monthly Basic Pay + DA every month.
  • The amount in EPS does NOT earn any interest.
  • You can’t withdraw any portion of EPS when you retire. The purpose is purely to provide monthly pension.

EDLIS Account

EDLIS:

  • EDLIS provides life insurance cover to employees.
  • This scheme provides Life insurance cover to a maximum of Rs. 7 Lakhs. The minimum insurance under the scheme is Rs. 2.5 lakhs.
  • The cost of the insurance is paid by the Employer.
  • Employer will pay 0.5% of monthly Basic Pay + DA every month (to a maximum of 0.5% of Rs. 15,000) towards the premium of the life insurance.
  • Employee is covered under this scheme from the first day of employment.
  • The life insurance coverage of an employee is purely based on his monthly Basic Pay + DA.
  • The Life Insurance cover is irrespective of whether employee dies during working hours or non-working hours.
  • The life insurance cover is irrespective of the cause of death of the employee.
  • There is no exclusions under this scheme.

How much is the coverage?

Your insurance coverage is 35 times of average of last 12 months’ Basic Pay plus DA. In addition, there will be Rs. 1.75 lakhs as a bonus.

Your coverage = [(average of last 12 months’ Basic + DA) x 35] + 1,75,000

For this calculation, a maximum of Rs. 15,000 will be considered as your last 12 month’s average Basic Pay + DA.

The bonus amount is based on 50% of the average balance in the account during the 12 months before the death of employee. The maximum allowed bonus amount is Rs. 1.75 lakhs

The nominee or legal heirs can claim this insurance amount following the death of the employee.

Employers have the choice of opting out of EDLIS and go for “Group Insurance” scheme. But, it should be approved by EPFO and the life coverage from Group Insurance scheme should be equal to or more than the coverage provided by EDLIS.

Employees Provident Fund Account Admin Charges

PF account admin charges are paid by the employer. Employer will pay 0.85% of Basic Pay + DA every month towards PF account admin charges. Employer will pay 0.01% of Basic Pay + DA every month towards EDLIS admin charges.

Employees Provident Fund Interest

Both employee and employer contribution towards EPF account will earn interest as per the interest rate from time to time. But, employer contribution towards EPS account will NOT earn any interest.

Employees Provident Fund Compounding Frequency

PF account follows yearly compounding frequency. It means that interest on contributions will be calculated every month in a financial year (from April to March) and they gets credited to the account in April of the following financial year.

What is VPF ?

VPF stands for Voluntary Provident Fund. VPF is an additional contribution facility for employees. In VPF, employees can contribute more than the compulsory 12% of Basic Pay + DA every month. But, employer will not match additional contribution by employee.

Employer will stick with the compulsory contribution of 12% Basic Pay + DA every month. Income Tax benefits on VPF will be same as that of the EPF only. No additional benefits for VPF.

Retirement Age

We need to know the retirement age for 2 things.

  • Retirement age for EPF : The minimum retirement age for Employees Provident Fund is 55 years. There is no fixed retirement age for Employees Provident Fund in Private Sector Organisations. It can be 55 years, 58 years, 60 years or even more. When the employee reaches the designated retirement age, he can withdraw the entire (100%) accumulated amount in Employees Provident Fund account. This will be the total of employee contribution, employer contribution and interest earned on both. Upon complete withdrawal, the EPF account will be closed and you are no longer a member of Employees Provident Fund.
  • Retirement age for EPS: The retirement age is 58 years for EPS benefits. It means, when the employee reaches 58 years of age, the employer contribution to EPS stops. Employee will be starting to get monthly pension immediately. In case, employee’s EPF retirement age is more than 58 years, then the entire 12% contribution from employer will go towards Employees Provident Fund account.

In-Active EPF Accounts

If an Employees Provident Fund account does not receive contributions for a consecutive period of 3 years (36 months), then it is considered as “In-active” account.

The in-active situation generally arises when an employee forgets to withdraw or transfer the PF amount due to job transfer reasons.

Such in-active EPF accounts can be withdrawn or transferred to existing Employees Provident Fund accounts.

From 01-Apr-2016 onwards, any in-active Employees Provident Fund account will earn interest as per the interest rate announced by the Government of India from time to time. Note that EPFO stopped paying interest to in-active accounts from April, 2011.

Recently, EPFO launched “Inoperative A/c Helpdesk” facility on its website http://www.epfindia.com

You can check for your in-active accounts using this facility and make a provision to withdraw or transfer the funds to existing PF account.

What is UAN?

UAN stands for Universal Account Number. Till October, 2014, every employee was given a PF Account number by their employer. If you change your job, then you used to get a new PF Account number. Maintaining multiple account numbers was a problem for many employees.

Quite a few employees forget to withdraw or transfer PF amount due to frequent job changes. To address these issues, EPFO came up with UAN (Universal Account Number) concept. With UAN, you will have only one PF account number even if you change your job multiple times.

When you change your job, just provide your UAN to your new employer. All your PF accounts will come under one umbrella.

UAN Benefits: In addition to this, UAN number provides the following benefits

  • You can view and update your profile.
  • You can download and print your UAN Card.
  • You can download your latest EPF Passbook.
  • You can check various PF Member Numbers allocated by your previous employers under UAN.
  • You can lodge and view transfer claims.
  • You can update KYC (Know Your Customer) details.

UAN Website: To get the above mentioned benefits, you need to register for UAN .

How To Check EPF Balance?

You can check your EPF balance in the following ways.

  • Annual Statement.
  • EPF Mobile App.
  • EPF Balance by SMS.
  • EPF Passbook.
  • UAN Number.

EPF Partial Withdrawal Rules

Employee can partially withdraw from PF account for the following reasons.

  • Purchase of House, Flat or Construction of house.
  • Purchase of Site.
  • Additions, Alteration, Improvements in house – First Time
  • Additions, Alteration, Improvements, Repairs in house – Second Time
  • Repay loan taken for purchase of site or house or construction of house
  • Medical treatment or disease
  • Marriage
  • Education of Children
  • Natural Disasters
  • Cut in Electricity Supply
  • Physically handicapped employees
  • Some special cases
  • Just an year before retirement
  • Withdraw at the age of 55 years
  • Unemployed for more than a month

Employees Provident Fund Full Withdrawal Options

There are many situations in which an employee can withdraw his entire (100%) balance in PF account. They are given below.

  • retirement from service after reaching the age of 55 years.
  • employee is unable to work due to permanent disability. Employee should produce Medical. Certificate from Doctor stating that employee is totally disabled and unable to work.
  • employee is migrating to a foreign country for permanent settlement or employment reasons.
  • employee’s job is terminated by employer due to layoff or redundancy reasons.
  • employee opts for VRS (Voluntary Retirement Scheme)
  • company is closed but the employee is transferred by the employer to another company which is not covered under EPF Act, then employee can withdraw entire (100%) PF balance after a period of 2 months
  • employee is transferred to another company (with the same employer) and if it is not covered under EPF Act, then employee can withdraw entire (100%) PF balance after a period of 2 months
  • employee’s service is terminated and he does not get another job for a continuous period of 2 months. Note that the 2 months waiting period will not be applicable for female employees resigning the job for the purpose of getting married
  • If an employee withdraws full (100%) PF amount after resigning from job, his EPF membership will be terminated. It means he is not a member of EPF scheme after the full withdrawal.

Employee Death Benefits

In case of death of the employee, the nominees can claim the following benefits.

Death before retirement: Entire accumulated amount in PF account. This will include total employee contributions, total employer contributions and interest earned on both. This will be a lump sum amount. Insurance coverage amount provided by EDLIS account. This will be a lump sum amount.

Monthly pension under EPS account. This is a regular monthly pension to spouse and 2 children below 25 years of age.

Death after retirement: Monthly pension under EPS account. This is a regular monthly pension to spouse and 2 children below 25 years of age.

Withdrawal Process

Earlier, withdrawal from EPF was a lengthy process for employees. Now, it is made simple with the help of UAN. If the employee had activated UAN, then employee can submit the withdrawal request directly to EPFO office. This helps Employees to withdraw from EPF without the employer’s signature or involvement.

Employee Death Benefits

In case of death of the employee, the nominees can claim the following benefits.

Death before retirement: Entire accumulated amount in PF account. This will include total employee contributions, total employer contributions and interest earned on both. This will be a lump sum amount.

Insurance coverage amount provided by EDLIS account. This will be a lump sum amount.

Monthly pension under EPS account. This is a regular monthly pension to spouse and 2 children below 25 years of age.

Death after retirement: Monthly pension under EPS account. This is a regular monthly pension to spouse and 2 children below 25 years of age.

Withdrawal Process

Earlier, withdrawal from EPF was a lengthy process for employees. Now, it is made simple with the help of UAN. If the employee had activated UAN, then employee can submit the withdrawal request directly to EPFO office. This helps Employees to withdraw from EPF without the employer’s signature or involvement.

Job Change

It is advisable to transfer PF amount to your new employer following a job change.

Is Employees Provident Fund Compulsory? Can I Opt Out?

  • EPF is compulsory for an employee if his monthly Basic pay + DA salary is less than Rs. 15,000/-.
  • Note that earlier the limit was Rs. 6.500/-. This change was effective from 01-Sep-2014 onwards.
  • An employee can opt out of EPF if his monthly Basic pay + DA is more than Rs. 15,000/- at the time of joining the organisation.
  • If an employee wants to opt out of EPF, then he has to do at his very first employment.
  • Once an employee becomes a member of EPF and he contributes to EPF even for a single month, then he has to continue with EPF. He can’t opt out.
  • In case if an employee opts out of EPF, then there will not be any EPF deduction from salary. It means you will get all salary components in hand.

EPS – Employees Pension Scheme

  • Under EPS scheme, employee will receive monthly pension after retirement.
  • Employee is eligible for pension only when he reaches 58 years of age and has completed 10 years of service.
  • Employee is eligible for pension whose age is between 50 years and 58 years and has completed 10 years of service. However, it is at a discounted rate of 4%.
  • There is no pension for an employee before the age of 50 years.
  • Under this scheme, the employee will receive monthly pension throughout his life. After his death, the monthly pension will go to spouse followed by 2 children up to their age of 25.

Nomination

  • Nomination facility is available in Employees Provident Fund.
  • Nomination is required to settle the benefits in case of death of the employee.
  • Employee can nominate either at the time of joining Employees Provident Fund or thereafter.
  • Employee can nominate his/her spouse, children, dependent parents and expired son’s widow and children. Employee can’t nominate brother or sister.
  • An employee who doesn’t have a family can nominate any person. However, this will become invalid once the employee gets married and acquires his/her family.
  • When employee nominate multiple people, the percentage of sharing of benefits should be mentioned. The total percentage should not exceed 100%.

FAQ About Employees Provident Funds (EPF)

What Is Salary In EPF?

Employee’s salary may have many components. But, for the purpose of EPF, salary means Basic Pay + DA (Dearness Allowance).
Salary = Basic Pay + DA.

What is the EPF Interest Rate (%)?

The current annual interest rate of the PF scheme is 8.10% for the financial year 2021-22. That is, for the period from 01-Apr-2021 to 31-Mar-2022.
Interest rate of PF account is not fixed and it is determined by the Government of India from time to time.

Is there any Income tax benefits in EPF?

Yes . An employee’s contribution to the EPF account is allowed as a deduction up to Rs 1.5 lakh under Section 80C of the IT Act. 

From FY 2020-21 onwards, the employer’s contribution to the EPF account shall become taxable if the contribution to EPF, NPS and/or superannuation fund exceeds Rs 7.5 lakh in a financial year. The excess contribution will become taxable. The employer needs to calculate the amount that will be taxed as a prerequisite, and this will be reflected in the employee’s Form 16.

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