If you are working as a salaried employee in an organisation which has employee strength of 20 and above, contribution to the EPF scheme must feature in your salary structure. While all of you know that EPF is a retirement planning scheme, many of you are unaware about the technical details of the scheme and other aspects. So, here is a complete guide to EPF –
What is EPF?
EPF stands for Employees’ Provident Fund and is a retirement-oriented fund for salaried employees. The EPF scheme is mandatory as per the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Any company which has 20 or more employees should compulsorily register for the EPF scheme which is managed by the EPFO (Employees’ Provident Fund Organisation).
How does EPF work?
The employee as well as the employer contributes 12% of the salary towards EPF account every month. The EPF scheme consists of two parts, EPF and EPS (Employee’s Pension Scheme). The employee contributes 12% of the salary into the EPF account. The employer, on the other hand, contributes 3.67% of the salary into the EPF account and 8.33% into the EPS account every month. However, if the basic salary is more than INR 6500, EPS contribution would be lower of 8.33% or INR 541 and the remaining would be credited to the EPF account. The salary for computing EPF and EPS contributions is considered to be the basic salary and dearness allowance.
What is the interest earned by the scheme?
The rate of interest applicable on EPF account is fixed by the central government. It is not a fixed rate and is subject to changes. For the year 2017-18, the interest rate stands at 8.55% per annum. EPS account, however, does not earn any interest.
What is the tenure of EPF contributions?
EPF account runs till the employee attains 58 years of age. However, the account can be closed if the employee is unemployed for 2 consecutive months.
Withdrawals and transfer of EPF
The minimum lock-in period for EPF is 5 years. Money deposited cannot be withdrawn during these 5 years. However, in some specific situations, you are allowed to withdraw your EPF investments. These situations include the following –
- For children’s higher education
- Repayment of home loan
- Purchase of a house
- Construction of a home
- Medical treatments, etc.
If you have completed 10 years of employment and then are unemployed for 2 months or more, you can withdraw your EPF account and get 100% of the amount available in the account. In such cases, you can also withdraw the EPS contributions made in your name.
Transferring of EPF is done when you change jobs. In such cases, your EPF account is transferred from one employer to another. Your EPF account gives you a UAN (Universal Account Number) by which your EPF account is recognised. While switching jobs, when the new employer opens a new EPF account, the account can be linked to the existing EPF account using your UAN number. The UAN number is also being linked with your Aadhar Card to provide seamless services when transferring your EPF account from one employer to another.
Tax treatment of EPF
EPF is an EEE investment avenue. This means that the investment done, the interest earned as well as the accumulated corpus under the scheme are tax-free. The employee’s contribution to the EPF scheme is allowed as tax deduction under Section 80C up to INR 1.5 lakhs. The employer’s contribution is also allowed as tax exemption provided the contribution is up to 12% of the salary. The interest earned and the accumulated corpus is also tax-free in the hands of the employee. In case of withdrawal from the EPF account, if the withdrawal is done during the lock-in period of 5 years, the amount withdrawn is added to the employee’s gross salary and taxed at his income tax slab.
Pension payments from EPS contributions
When the employee completes 10 years of employment and attains 58 or 50 years of age, he becomes eligible to receive pensions from the EPS contributions done by the employer. The pension is paid to the employee till his lifetime and after his death, it continues to be paid to his family member who has been nominated. Pension amount is calculated using the following formula –
Monthly amount of pension = (pensionable salary*pensionable service)/70
Additional EPF contribution
An employee is allowed to contribute more than 12% of his salary towards EPF. This additional investment is called VPF (Voluntary Provident Fund). The money is invested in the EPF account and it earns the applicable interest.
So, understand the concept of EPF, how it works, the interest added, tax benefits and other aspects so that you can understand the retirement fund being created from your salary income.