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EPF is an investments and savings scheme offered by the government’s Employees Provident Fund Organisation (EPFO) under the Ministry of Labour and Employment. It is one of the main schemes brought to life under the Employees Provident Fund and Miscellaneous Provisions act, 1952, among other social security schemes like employees’ insurance and pensions. This scheme is applicable to any salaried persons working in an organisation with 20 or more employees.
EPF is calculated as 12% of the total of basic wage, dearness allowance and retaining allowance and is deducted from the employees’ salary. An equal percentage of 12% is contributed by the employer. But 8.33% of employers’ contribution is towards the Employee’s Pension Scheme (EPS) and the remaining amount goes to the EPF.
Suppose a person’s basic salary per month is Rs.40,000, then Rs. 4800 will be deducted as employee’s contribution to EPF. An equal amount will be contributed by the employer. But the employer’s contribution is calculated on a capped amount of Rs 15 000. Hence any employee’s basic pay which is more than or equal to this amount will receive 8.33% of 15 000 (Rs. 1250) towards EPS and the remaining amount as EPF from the employer’s contribution. In case a person’s basic pay is below Rs 15,000, then 8.33 percent of the total amount will be directed to EPS and the rest to EPF as part of the employer’s contribution. Following table gives a snapshot of contribution for better understanding.
| Deduction Details | Employee’s Contribution | Employer's Contribution | |
|---|---|---|---|
| EPF Share | Pension Share (EPS) | ||
| Cont. for Due Month 112020 | 4800 | 3550 | 1250 |
| Cont. for Due Month 122020 | 4800 | 3550 | 1250 |
In case any employee wishes to contribute more than the stipulated 12%, he can opt for a Voluntary Provident Fund (VPF) which is calculated as a separate account. In case of VPF, the employer is not obliged to make any contribution. The interest earned on VPF is also exempted from tax.
EPFO also offers an interest rate on the provident fund. The Ministry of Labour and Employment decides the rate of interest on an annual basis, keeping in mind the financial situation of the previous year. The interest on PF is calculated on the basis of monthly running balance of the employee.
Every member of the EPFO is given a Universal Account Number (UAN) which is linked to all the member IDs and PF account numbers of a person from different organisations that he or she has worked in. This enables the person to easily transfer, withdraw and view all the member IDs linked to his UAN. Online facilities are also available now. By registering on the EPF Member Portal, any person can access services such as fund transfer, withdrawal, and balance enquiry online, after linking UAN with Aadhaar and PAN.
The motive behind the EPF scheme is that any employee can access a good sum of money as savings at the time of retirement. When an employee retires from service, he is eligible to get both the employer’s and his own contribution towards EPF along with the accrued interest. Having said that, the EPFO allows employees to withdraw money from the fund even before retirement. These are in the form of EPF Advances. In case a person becomes unemployed before the age of 55 years (Retirement age), he or she is allowed to withdraw upto 75% of their EPF collection if they have remained unemployed for at least one month. The remaining 25% can be withdrawn if the person remains unemployed for 60 days or more. Even during the period of employment, any person can withdraw from the EPF in order to fund housing, real estate, marriage or any other such expense.
EPFO has also the provision of transferring an employee’s PF in case he or she changes their job and moves to another organisation.The Fund collected in the old organisation can be transferred to the PF account in the new organisation. This transfer can happen automatically by filling FORM 11.
The amount contributed towards EPF is eligible for income before tax deductions under Section 80C. As of now, the interest earned on EPF is also exempt from tax. Even the total EPF amount at the time of maturity can be exempt from tax subject to certain conditions. EPF Advances or early withdrawals are taxable if the employee has not completed five years of continuous service. In case a person withdraws before five years of continuous service, then the tax is calculated on the employer’s contribution and on the interest earned on this amount.
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