Everything you need to know about Employee’s Provident Fund (EPF) !
Employees’ Provident Fund or the EPF as it is commonly called accounts for a sizeable chunk of your salary (the CTC). At times we wonder, what is the benefit of EPF and almost everyone who is new to financial planning world, at some point, thinks that instead of monthly deduction towards EPF the amount should be ideally paid to the employee. However, if we look at things more conservatively and bring in risk, reward, emergency and other such similar factors we realize that this EPF component is one of the important aspect of salary and should ideally stay. We, at Wealthtrust, thought to share a simple and yet easily understandable article on EPF with tax planning increasing off late with year-end closing nearing.
What is EPF?
EPF is retirement benefit scheme that is generally available to all salaried employees and forms an important tool for financial planning particularly retirement.
Under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, EPF has two components namely Employees’ Provident Fund Scheme 1952 and Employees’ Pension Scheme 1995 (EPS). These are two different retirement saving schemes under which any salaried individual is covered if he/she is drawing more than Rs 6,500 per month as basic salary.
In general, both employer and employee are required to contribute 12% of the ‘basic pay’ along with dearness allowance (DA) towards EPF and EPS combined. The corpus deposited by the employee is generally added to EPF while 8.33% of the 12% employers’ contribution is diverted in EPS while remainder is added to EPF. In cases where the basic pay is more than Rs 6500 per month, the EPS contribution is restricted at 8.33% or Rs. 541 per month while the remainder goes into EPF.
Contribution to EPF & EPS
Interest on EPF
The EPF interest rate is determined by the central government in consultation with the Central Board of Trustees. For fiscal year 2016-17, the interest on EPF is 8.65% which computed at the end of each year. Interest is applicable to only EPF component and the pension scheme or the EPS generates no interest.
The employer contribution is exempt from tax up to 12% contribution while employee’s contribution is eligible for tax benefit under Section 80 C of the Income Tax Act. EPF is under the EEE norm currently indicating that the money invest, interest earned and money withdrawn after a specified period (5 years) are all exempted from income tax.
EPF provides you with nomination facility whereby mother, father, spouse or children can be nominated for receiving the proceeds at the time of death of an employee. Government, currently, doesn’t allow nominating siblings.
Transfer and withdrawal policy
If a person is not employed for two months at a stretch, there is a prevision by which he/she can choose to withdraw EPF. However, at the time of switching jobs it is advisable to transfer the existing EPF with previous employer to new employer. This process has become seamless now with the introduction of Universal Account Number (UAN) which is discussed in detail in subsequent para. If you withdraw the EPF amount before completion of five years with an employer the corpus withdrawn is taxed as per your current income tax slab as the amount withdrawn is then added to your gross salary.
Further, withdrawal is generally not permissible if the person is still working, however, there are certain circumstances under which it may be permissible. Such circumstances include children’s higher education, marriage, medical treatment, home loan repayment, construction of house, purchase of flat, etc. Non-refundable advances are also allowed after having completed minimum five years of membership.
In case your service is less than 10 years and you have opted for withdrawal on account of no job, an employee is entitled for 100% of EPF including interest on EPF. In addition, employee is also entitled for receiving EPS contribution that is computed based on withdrawal benefit (on pension).
An employee start receiving pension from EPS amount after completion of minimum 10 years of service and attaining the age of 58 or 50 years. The pension amount is payable to the subscriber until he is alive and in the event of death of the employee, members of his family -whoever is nominated is entitled for the pension. Monthly pension is determined based on ‘pensionable service’ and ‘pensionable salary’ for which the following formula is generally used:
Monthly pension = (Pensionable salary X Pensionable service) ÷ 70
It is worth noting here that the pensionable salary is nothing but your basic salary on which you have paid EPS premium. Thus, monthly pension will have received will be nowhere closer to real CTC.
Top-up on EPF (Voluntary Provident Fund)
Yes, you can always invest more than 12% of regular contribution. However, any amount over and above EPF is termed as Voluntary Provident Fund or the VPF. In this case the excess amount is invested in EPF and is eligible interest benefit.
UAN services and other recent developments
UAN is a unique number assigned to an employee and it indicates that the subscriber is availing Employees’ Provident Fund Organization (EPFO) service. EPFO generally manages the money in your EPF account.
UAN number is fixed throughout the lifetime and has portable flexibility. Thus, when an employee changes job his new EPF account which will have different account number and will be opened by new employer can be linked directly to UAN. Thus, UAN acts as an umbrella of multiple EPF IDs allotted to an employee by different firms.
EPFO, in a recent development, introduced the facility of linking Aadhar (unique id) to UAN. This would help the member avail facility in a better and seamless manner. The facility is available at the official website http://www.epfindia.gov.in under Online Services section.
Benefits of Linking UAN With Aadhaar
- Submit claims directly to EPFO without any mediation of employer
- Receive monthly updates on registered mobile number
- Download e-passbook anytime
- Link multiple EPF accounts allotted over the years
- Edit and update personal details
Lesser know facts about EPF
- EPF provides life insurance as well – A lot of people are not aware about this benefit. Let us explain how this works. If a company does not provide insurance cover to its employees under group life insurance plan, then the companies are required to contribute 0.5% of monthly basic pay towards Employees’ Deposit Linked Insurance (EDLI) scheme. This contribution is capped at Rs 15000. Companies that are already covering employees for insurance are exempted from this plan of EPFO.
- RTI for EPF related issues – RTI application is allowed to get any kind of information regarding EPF including issues related to balance, withdrawal, transfer etc.
- Opting out from EPF made available- We generally think EPF is mandatory contribution. However, this is not the case. EPFO guidelines says that if an employee’s salary is more than Rs 15,000 per month he/she can avail option of not being a part of EPF scheme. If this scheme is opted, the entire salary is paid out the employee, without any deduction, every month. Having said that, it is important to note here that an employee has to opt out of Provident Fund in the start of his job and if he/she is part of EPF programme even once in his life, this option of opting out stands null and void.
Understanding EPF calculation
Let’s assume, your basic pay is Rs 25000 per month which increases at a rate of 10% every year. Interest on EPF as highlighted above in the article is calculated on a yearly basis on your contribution of 12% along with employers’ contribution of 8.33% (EPF) and 3.67% (EPS). Assuming rate of interest offered by the government to be 8.5% for fiscal 2018 let us see the EPF calculation:
Note: Illustration is shown for 3 years period; EPS amount is not added to total.
EPF contribution is one of the best and least risky ways for salaried people to build on a corpus for retirement or any other financial need over the long term. It can form the debt part of the retirement portfolio while equity part can be taken care of by equity oriented mutual funds.
Start investing in mutual funds on WealthTrust Mutual Fund App
New to Mutual Funds? Learn more about basics of mutual funds.