What is the Employee Provident Fund (EPF)?
Every salaried person must have seen some deduction of a portion of their salary by their employer in the name of EPF. But they are not usually aware of what is EPF and why it is deducted?
To make you understand everything about the Employee Provident Fund (EPF), let’s read this article till the end so that at least you must know where your salary portion is going and how it will help you in the future.
Employee Provident Fund (EPF) is a retirement scheme that is available for all salaried employees. Under the EPF scheme, the fund of the employees gets accumulated for retirement or emergencies. Moreover, the scheme is under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the fund are maintained and regulated by the Employees Provident Fund Organisation of India (EPFO), so your amount is safe as well.
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What are the benefits of the Employee Provident Fund (EPF)?
- Enjoys tax benefits
- Helps in building saving corpus for a long run
- Helps to build a financial backup for an emergency fund
- A good investment for living a tension free life after the retirement
How to check the Employee Provident Fund (EPF) Balance?
Once your EPF account is opened by the employer, you will be allotted a Universal Account Number (UAN) to check the balance of EPF. The UAN is a 12-digit unique number that has been given to every PF member.
UAN number is mandatory for all the employees to manage and transfer the PF amount. Using the UAN, employees can track their monthly contributions, the latest balance maintained in their account, the withdrawal and can manage their PF accounts all by themselves.
You can also check your EPF balance by giving a missed call to 011-22901406, from your registered phone number.
Eligibility for EPF Scheme
- Employees getting monthly salary less than Rs 15,000 have to mandatorily contribute towards the EPF. However, if the employee and employer agree to voluntarily become the member and contribute, then if they can do so with the permission of Assistant PF Commissioner.
- Every establishment/organization having 20 or more employees workings are under the obligation to deduct EFP.
- Organizations with less than 20 employees can also voluntarily participate in the EPP scheme.
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Rate of contribution from the employer and employee to EPF
An employer and employee, both are required to contribute 12% of the basic salary/wage and Dearness allowance (if forms part of the salary) in the PEF account. For example, if you are drawing a monthly salary of Rs. 12,000 and dearness allowance of Rs. 5,000, then 12% of 17,000 that is Rs. 2,040 shall be contributed by the employer and Rs. 2,040 will be contributed to by the employee.
Further bifurcated, out of the 12%, 3.67% contribution goes in the EPF and the balance 8.33% is contributed to your Employee’s Pension Scheme (EPS). Moreover, if any employee wants to contribute a higher rate voluntarily, then he/she can do so at the rate of more than 12% on the basic pay. The employer doesn’t need to contribute the same high rate as opted by the employee.
The contributed fund provides an interest of around 8% – 12% and such rate are decided mutually by the government and the central board of trustees. Although, the current annual interest rate is 8.75% as per the official EPF India website.
Once you have started to contribute to the PF account, you can’t opt from the scheme. However, if you don’t want to be the part of the scheme, you have to inform your employer and fill FORM 11.
It is important to note that your EPF account continues even if you change your job. So, you have to update EPF details with the new employer.
Interest on EPF
The Interest in EPF is calculated based on monthly running balance and the employee’s account gets credited with the compound interest on the EPF balance as on the 1st of April every year.
Withdrawal from the EPF
The employee can withdraw the amount from the EPF account after completing the 55 years of age. On retirement, the withdrawal amount shall consist of Employee contribution + Employer contribution + Accrued Interest as retained in the EPF account.
It is also allowed to partially withdraw from the EPF account for various purposes which include the purchase of a house, wedding expenses, or medical emergency, resignation due to permanent total mental/bodily incapacity, permanent death of the member, etc.
Tax benefits of EPF
Contribution by the employer: The amount contributed by the employer in your EPF account is tax-free.
Contribution by the employee: The amount contributed by the employee can be claim as a deduction under section 80C of the Income Tax Act, 1961. Moreover, the interest and the withdrawal amount from your EPF account is also exempt from the income tax on completing the five years of continuous service.
It should be note that if one has left the jobs in before completing the five years but transferred the EPF from old to the new employer, it will be counted as continuous service. Therefore, to get the income tax benefit, it is important to transfer your existing PF to the new employer.
Tax on early withdrawals
If an employee withdraws the EPF amount before the continuous service of five years, then it attracts the tax implications.
The amount will be taxed:
The employer’s contribution and the interest earned get taxable under the income tax act.
The benefit of 80C will be withdrawal:
The deduction allowed under section 80C gets add back to the income and taxed in the hands of the employee.
Apart from this, there is also an implication of TDS introduce by the government from June 01, 2016. As per the TDS provisions, if the employee withdraws EPF amount after completing five years of service, then no need to deduct TDS otherwise on the premature withdrawal, if the withdrawal amount exceeds Rs. 50,000 then TDS @ 10% shall be applicable.
However, to get an exemption from 10% TDS, Form 15G or Form 15H can be submitted to the Income-tax department.