During last week, one of the readers of our blog asked me to write about Employee Provident Fund (EPF) matters. This article is about the basics of EPF. Hope this helps understand EPF better.
Applicability – All establishments in which 20 or more persons are employed have to get covered under EPF Act. The establishments in which less than 20 persons are employed can voluntarily register under this Act. (The voluntary registration process is a little cumbersome. Maybe the department will ease this process as part of its simplification drive)
EPF Rate – The Company has to contribute 12% of the basic salary. Suppose, an employee is getting salary of Rs.50,000 per month (break up Rs.15,000 Basic Pay + House Rent Allowance of Rs.10,000 + Conveyance Allowance of Rs.2000 + Special Allowance of Rs.20,000 + Reimbursement of expenses Rs.3000), company has to contribute 12% of Rs.15,000 towards EPF contribution.
How much employee has to contribute? He has to contribute an equal amount. In the above example, he has to pay 12% of basic i.e., Rs.1800 to EPF account.
Can an employee contribute more or less than 12%? Lesser than 12% is not permitted (the government may do away with this restriction soon) but more than 12% is permitted. He can contribute 20%, 30% or even 100% of basic pay to EPF account. Any amount paid in excess of 12% is called as ‘Voluntary Provident Fund (VPF) contribution.
What happens in case the employee is getting basic pay of Rs.40,000 per month?
The companies can chose to contribute either on Rs.15000 (up to which it is compulsory for the company to contribute) or on Rs.40000. There is no restriction for PF contribution on higher basic pay.
Where does the EPF money go?
This money goes into 2 accounts, namely (a) EPF account (b) Employee Pension Scheme (EPS) account. Continuing the above example, out of Rs.1800 (12% of Rs.15000):
- Employee contribution of Rs.1800 (12%) goes towards EPF account
- Employer contribution of Rs.1250 (8.33%) goes towards EPS account and the balance of Rs.550 (3.67%) goes towards EPF account
When can one withdraw amount from Employee Provident Fund Account?
Accumulations in the EPF account can be withdrawn under the following situations
- On retirement from service after attaining the age of 55 years
- On retirement as a result of total and permanent disablement rendering the person incapable for work;
- Immediately before migration from India for permanent settlement abroad or for taking employment abroad;
- Termination of service upon mass / individual retrenchment or under VRS
- Termination of job and remaining unemployed for over two months
- Leaving the job from a covered establishment and joining an establishment not covered by PF
- There are also provisions to withdraw amounts from the fund towards purchase / construction of house, purchase of LIC policies, advances for certain special cases subject to certain conditions and approval by PF authorities
Accumulations out of EPS will be payable as follows
- Superannuation pension after rendering service for 10 or more years, and retiring on attaining the age of 58 years
- If required, withdrawal of pension before 58 years may be allowed, after attaining 50 years of age (but with reduced amount of pension).
- Withdrawal of amount in EPS is allowed for people leaving employment before service of 10 years
- After completion of 10 years’ service, a person will have to wait till he / she attains the age of 50 years to apply for pension. No withdrawal benefit is allowed before that
Whether withdrawal of EPF amount is tax-free?
- Withdrawal of EPF amount after completion of 5 years of service is completely tax-free
- Withdrawal of money even before the completion of 5 years of service is tax free provided the reason of termination of employment is due to ill-health or reasons beyond the control of employee (like closure of the business)
- Other than the above reasons, if an employee withdraws before completing 5 years of service, employer portion of PF and interest thereon is taxable. Further, if any benefit under section 80C was availed earlier for employee contribution, such benefit will be reversed and tax will have to be paid on withdrawal
Is it a good investment option?
This is one of the good long term investment options. We suggest all eligible people to opt for EPF scheme.
- Minimum Salary applicable is hiked for Employee Provident Fund (EPF) Account
- Tax implication on withdrawal from Employee Provident Fund (EPF)
- Whether delayed payment of PF contribution of the employees is allowed as deduction under Income Tax Act.
- Ten reasons why your Take Home Salary is much lesser than the CTC
- Public Provident Fund | a very good investment option
Thought for the day
All days are not same. Save for a rainy day. When you don’t work, savings will work for you.