When a fresher joins in, sometimes it can get a little tricky to explain to them why we want to save a few funds from their salary in their PF account, and they’re the ones who’ll get the benefit in the end, not us.
They have all sorts of questions in their heads, and you’re put in a position where you want to address them in the simplest language without it being overwhelming to those new poor souls.
So today, we’ll explain how you can share the essential details with them without using jargon they don’t understand.
Let’s begin with the first question.
What is a Provident Fund After All?
A PF is an essential financial tool established to facilitate employees’ long-term savings; primarily, so they can retire in peace knowing that they have a lumpsum amount in their back account.
In India, various provident fund plans cater to individuals across different employment sectors, including self-employed individuals, private sector employees, and government workers.
It’s contributed on a monthly basis and if they continue to contribute to it regularly, over time, they’ll accumulate a lump sum payout upon retirement or their job termination. Plus, the government oversees this voluntary investment scheme and empowers the individuals who avail themselves of its benefit to earmark a portion of their income.
Furthermore, the Employee Provident Fund (EPF) is regulated by the Central Board of Trustees (CBT), comprising representatives from employers, employees, and the government.
What is the Employee’s Provident Fund in India
The Employees Provident Fund (EPF) in India is a widely used savings scheme that Employees Provident Fund Organization (EPFO) oversees under the Government of India’s supervision.
It involves a joint contribution of 12% from both the employee and the employer. Your employee can calculate it based on their basic salary and dearness allowance. Currently, the EPF deposits earn an interest rate of 8.15% per annum. Importantly, the interest accrued on EPF remains tax-free, and employees can withdraw it without any tax liability.
Upon retirement, these employees will receive a lump-sum amount that includes the accumulated interest. EPF India offers user-friendly online services through its official portal to ensure transparency, efficiency, and convenience for individuals.
Types of Provident Fund
Provident funds have three major types: Statutory Provident Fund, Recognised Provident Fund, and Public Provident Fund. Let’s understand them in detail.
- Statutory Provident Fund (GPF):
You can also call it the General Provident Fund. It primarily caters to government employees, educational institutions, universities, railways, and specified organizations.
Employees contribute to their GPF account and get interest at a fixed govt rate, which can change over time. As of November 2022, the interest rate stands at 7.10% annually.
- Recognised Provident Fund:
This fund is for private organizations who have a minimum of 20+ employees. These companies can either establish their own PF trust or participate in a government-approved scheme.
So, if your company comes under this category, and you choose to with the former, your firm will need to get the approval of the Commissioner of Income Tax (CIT) for their PF trust.
- Public Provident Fund (PPF):
This one is for the general public, regardless of their employment status.
They can be salaried, self-employed, or even unemployed. PPF offers a 15-year investment period, and you (or your employees) can contribute anything ranging from ₹500 to ₹1.5 lakh per year.
It provides an attractive long-term investment option with a lock-in period of five years.
How Does a Provident Fund Work
The Provident Fund, or EPF, operates through a systematic process involving both employees and employers.
Initially, 12% of an employee’s basic salary, including dearness allowance, is contributed to this fund, with the employer also contributing an equal 12%. But the 8.33% of the employer’s share is allocated to the Employees’ Pension Scheme (EPS), while the remaining 3.67% is placed in the employee’s EPF.
Not to mention, these contributions are deducted from the employee’s monthly salary and are then pooled with contributions from other employees. These pooled funds are invested and accrue interest, that government determines typically between 8 to 12%.
The EPF continues to grow until an employee chooses to withdraw it, usually after reaching the age of 58.
Withdrawal can occur either at retirement (age 58) through the company or before retirement if the individual has been unemployed for a full month, allowing for a 75% withdrawal of the provident fund.
However, the employer’s contribution can only be withdrawn after reaching the age of 58.
Features and Benefits of Provident Fund
The Employee Provident Fund (EPF) also offers several noteworthy features and benefits. Here are the top ones:
- Capital Appreciation: EPF provides a pre-fixed interest rate on deposits, fostering capital growth. Maturity rewards further enhance fund growth.
- Corpus for Retirement: It means that 8.5% of the employer’s contribution goes to the Employee Pension Scheme, building a robust retirement fund for financial security and independence.
- Emergency Corpus: EPF acts as an emergency fund during unexpected situations, offering financial stability to the ones using it.
- Tax-saving: Employee contributions are tax-exempt under Section 80C, and EPFO scheme earnings are also tax-free, up to a limit of Rs. 1.5 Lakh.
- Easy Premature Withdrawal: EPF members can partially withdraw funds for various purposes like education, housing, weddings, or medical expenses.
Besides that, EPF also promotes long-term budgeting and savings, facilitates gradual savings through monthly deductions, and serves as an emergency corpus for you and your employees. It offers a secure retirement fund, is a tax-saving instrument, and allows easy job transitions with reduced claim settlement timeframes.
What tax benefits are associated with contributions to the Employee Provident Fund (EPF)?
For Payments to Employee Provident Fund (EPF), you get certain tax advantages under Section 80C of the Indian Income Tax Act of 1961. And you can enjoy these benefits if your contributions to EPF accounts have a maximum limit of Rs. 1.5 Lakh.
But it’s important for you to understand that the tax won’t be deducted from this contribution if you have made them for a continuous period of five years to an EPF account. If this duration is less than five years or you happen to withdraw this this amount prematurely, then your income tax will be deducted at the source (TDS).
How is EPF Calculated
If you want to secure a robust retirement fund, you need to know how to calculate it.
EPF comprises contributions from both the employee and employer, deducted from the monthly salary and stored in a PF account, which accumulates over time.
The calculation follows government rules, with interest computed annually. At an interest rate of 8.15%, the monthly interest rate is 0.6792%. For instance, if your balance for a month is ₹6000, the interest for that month would be ₹6000 * 0.6792/100%.
What is the EPF Contribution
Both the employee and the employers have to make the contribution, so you need to understand who will contribute how much and for what duration.
For employees, the contribution is either 10% or 12% of their basic pay and depreciation allowance, depending on the firm’s size (less than 20 employees) or industry type (specific sectors). In most cases, it’s 12% of the basic pay plus depreciation allowance.
Employers contribute 12% of the employee’s basic pay to the EPF. Out of this, 8.33% goes to the Employee’s Pension Scheme (EPS), 3.67% to the EPF account, and an additional 0.50% to the Employees Deposit Linked Insurance (EDLI) account.
Since June 1, 2018, employers are also required to pay an administrative fee, with a minimum of Rs. 500 and Rs. 75 in case of no contributions for a month. This combined contribution amounts to a total of 24%.
Employee Contribution to EPF
Each month, your employees are required to allocate 12 percent of their basic salary, including the Dearness Allowance, towards their EPF account.
For instance, if the basic monthly salary is Rs. 15,000, the employee’s contribution would be 12% of 15,000, amounting to Rs. 1,800. This Rs. 1,800 constitutes the employee’s obligatory contribution to the EPF fund.
Employer Contribution to EPF
This is the financial support that the employer provides to their employees towards the EPF account—so technically, your company to your employees.
In this system, employees contribute 12 percent of their basic salary, along with the Dearness Allowance, monthly to their EPF account. For instance, if an individual’s basic salary is Rs. 15,000 per month, their employee contribution would amount to 12% of Rs. 15,000, equating to Rs. 1,800. The employer also contributes to this fund, which is an additional amount beyond the employee’s contribution.
This dual contribution ensures the growth of the employee’s retirement savings and financial security.
What is the Interest Rate
The interest rate for the Employee Provident Fund (EPF) in the year 2018-19 was 8.65 percent. But this interest is calculated monthly and applied monthly.
At the end of each month, the calculated interest is deposited into the EPF account. For instance, if you contributed Rs. 2350 in the first month, the second month would have a similar contribution, totalling Rs. 4700.
With a yearly interest rate of 8.65 percent, the monthly rate is 0.72 percent. So, in the second month, the interest on Rs 4700 would be Rs 33.84. It’ll continue throughout the financial year, and the total interest will be deposited in your EPF account at year-end.
As per the EPFO’s norms, the EPF interest rate for 2023-24 is 8.15 percent.
How is Interest Being Calculated in EPF
Interest in the Employees’ Provident Fund (EPF) is calculated monthly, exactly how you make the contributions monthly. Again, the government set the interest rate annually; for the year 2023-24, it’s 8.15%.
To calculate the monthly interest, simply divide this rate by 12, it’ll show you a monthly interest rate, for the current year, it’d be 0.6792%. Let’s say that your EPF balance for a month is ₹6,000, the interest accrued that month would be: ₹6,000 * 0.6792/100%, that’s ₹40.75.
EPF contributions are made by both the employee (12% of basic pay and dearness allowance) and the employer (8.33% for EPS and 3.67% for EPF). The interest is credited to your account annually but is calculated monthly based on your monthly balance.
What are the Objectives of EPFO
The primary objectives of the Employee Provident Fund Organization (EPFO) are as follows:
- Every employee should maintain a single EPF account, so the process is streamlined for better financial management.
- Compliance with EPFO needs to be regulated by simplifying processes for both employers and employees.
- Everyone should strictly adhere to EPFO rules and guidelines by businesses to promote fairness and accountability.
- Infrastructure needs to be improved, making sure that the online services are reliable to enhance user experience.
- Provide easy online access to member accounts for convenient monitoring and transactions.
- Claim settlement times should be reduced from 20 days to just 3 days to ensure prompt financial support for members.
- Voluntary compliance among employees and employers should be promoted to strengthen the EPF system.
What are the Important Things to Consider for EPF
The first thing to consider while deadline with it is to know that the maximum salary for EPF contributions is Rs. 15,000.
While employers are not obligated to contribute beyond this limit, employees have the option to increase their contributions voluntarily. But this requires a joint request from both the employee and employer.
Although, if the contributions exceed the Rs. 15,000 cap, the employer will have to incur additional administrative costs, equal to 0.50% of the employee’s salary exceeding this threshold.
For international workers, there is no salary cap set at less than Rs. 15,000.
What is EPF Eligibility
There are several key criteria that you need to take into consideration.
Firstly, companies employing over 20 individuals are mandated by law to register for the Employees’ Provident Fund (EPF) program. Conversely, companies with fewer than 20 employees can opt for voluntary registration.
Secondly, all salaried employees, irrespective of the size of their employer, are eligible for EPF participation. Plus, the employees earning a monthly salary below ₹15,000 must compulsorily register for EPF. And those earning more than ₹15,000 can choose to voluntarily enrol in the scheme with approval from the Assistant PF Commissioner.
Please note that the EPF benefits are accessible throughout India, except in Jammu and Kashmir.
How to Withdraw EPF
To check your EPF (Employee Provident Fund) balance, you can follow these steps:
You can make a complete withdrawal if:
- You have retired.
- You’re unemployed for over two months.
- You’re transitioning jobs, but the gap between jobs must exceed two months.
Partial Withdrawal is allowed for
- Wedding Expenses
- Higher Education
- Land Purchase or House Construction
- Home Loan Repayment
- Housing Property Renovation
EPF Taxation:
- If you withdraw your EPF within five years of opening the account, it’ll be tax-free.
- If withdrawn before five years, taxation applies.
Withdrawal Process:
- Offline Withdrawal Process: Fill and submit the ‘Composite Claim Form’ to your EPFO office, attested by your employer.
- Online Withdrawal Process: Ensure an active UAN, link it with Aadhaar, verify KYC details, and follow the instructions on the portal via the UAN portal for online pf withdrawal.
Provident Fund Got Easier
Now that you know all the required details, you can now explain these financial instruments with confidence to your employees.
Planning for retirement is not just a choice; it’s a wise investment in your future well-being. So, it’s essential to ensure that any individual should know about the importance and all the necessary details about it.