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What is the Employees' Provident Fund (EPF) and How Does it Work?

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August 5, 2022


What’s Inside

No matter what kind of investor you are, you’ll agree that your financial plan should include the following three key objectives:

  • To create wealth
  • To retire comfortably
  • To have a financial safety net for your family

The Employees’ Provident Fund (EPF) scheme, created and administered by the Employees’ Provident Funds Organisation (EPFO), can help you check off all these three goals in one go! 

Finding it hard to believe? Well, so did I, when I first heard of the EPF scheme. But now that I’ve actually taken a deep dive into how the Employees’ Provident Fund scheme works, I know better. So, today, I’ve decided to play good samaritan and tell you everything I’ve learned about this multifaceted scheme.

What is EPF?

The Employees’ Provident Fund scheme or the EPF, as it is more commonly known, is a savings scheme offered by the government of India for salaried employees. It is a three-part investment avenue that includes the following schemes. 

  • The Employees’ Provident Fund, 1952 (EPF)

This is the part that allows you to create wealth over the long term. Over the course of your working life, you will have to deposit a portion of your earnings in the EPF scheme. And at the time of retirement or death, you or your nominee will receive the capital plus the accumulated interest. 

  • The Employees’ Pension Scheme, 1995 (EPS)

EPS is the part that helps you retire comfortably since it takes care of your pension income. Under this scheme, employees who have attained 58 years of age will receive a monthly benefit. This essentially acts as a steady stream of income that can make retired life more convenient. 

  • The Employees’ Deposit Linked Insurance, 1976 (EDLI)

The EDLI scheme gives you a life insurance cover, so your family is financially protected in case something happens to you. In case of your demise, your family will receive benefits equal to 35 times your average monthly salary, subject to a limit of ₹ 7 lakhs. 

So, there you have it. The EPF scheme is actually a 3-in-1 investment avenue that helps with wealth creation, pension generation and life insurance coverage. 

How Does the EPF Scheme Work?

Employees working in eligible organisations need to contribute a specific portfolio of their salary to their EPF accounts. Your employer also matches your contribution and deposits the same sum in your EPF account. 

Here is how these contributions work.

  • Employee’s Contribution 

This part is fairly straightforward. If you are an eligible employee, 12% of your salary will go directly into the EPF scheme each month.

  • Employer’s Contribution 

The employer’s contribution to the EPF scheme is broken down into several parts, as shown below.

For the purpose of computing the employee’s and the employer’s contribution, the term ‘salary’ includes the following components —

  • Basic salary 
  • Dearness Allowance (DA) (including cash value of any food concession allowed to the employee) 
  • Retaining Allowance (RA) if any

However, practically speaking, private companies don’t pay out dearness allowance. And even retaining allowance is only rarely paid out as a part of the salary. So, in case you are a private sector employee, it is highly likely that only your basic salary will be used to compute the contributions you and your employer have to make to your EPF account. 

Understanding How EPF Contributions Work

To better understand how EPF contributions work, let me take you through some examples with real numbers for more clarity. Recall from the table above how the employer’s contribution to the EPS account is at 8.33%, with the salary limited to ₹ 15,000?

So, we’ll take up two scenarios, as follows:

  • Basic salary below ₹ 15,000
  • Basic salary above ₹ 15,000

Scenario 1: Basic salary is below ₹ 15,000

Let’s assume that your basic salary comes up to ₹ 10,000. In this case, here is how the breakup of the employee and employer contributions will work. 

Here, since your basic salary is less than ₹ 15,000, you can use the entire amount to compute the employer’s contribution to your EPS aka pension account. But what if your basic salary is more than this limit? That’s what the next scenario is all about.

Scenario 2: Basic salary is above ₹ 15,000

Here, let’s say your basic salary is ₹ 20,000. So, given this number, check out how much you and your employer will contribute to your EPF and your pension account. 

Here, as you can see, the EPS contribution is limited to ₹ 1,250 because the salary limit for this purpose is capped at ₹ 15,000. This sums up how your contribution and your employer’s contribution are calculated.

EPF Eligibility 

Not all organisations are liable to register with the EPFO and open accounts for their employees. Neither are all employees. Check out the rules regarding eligibility for the EPF scheme.

  • Any organisation with 20 or more employees must mandatorily register with the EPFO and offer EPF benefits to its employees. 
  • Employees with a salary up to ₹ 15,000 must be a part of the EPF scheme.

That said, employees earning more than ₹ 15,000 — who are known as non-eligible employees — can also be a part of the EPF program. To do this, both the employee and their employer should agree, and then obtain the permission of the Assistant PF commissioner.

How Does the EPF Scheme Benefit You?

By contributing to your EPF account regularly, you can earn a threefold benefit. Your EPF account gives you the advantage of capital appreciation, pension benefits and insurance cover. Let me give you the details of how these benefits work.

Benefits from EPF (Employees’ Provident Fund)

You will earn interest on the amount you contribute to your EPF account each month. The interest rate may be revised by the government, at its discretion, on an annual basis. The current EPF interest rate for the financial year 2022-23 is 8.10% per annum.

The interest is computed on your EPF balance each month, but it is credited to your account on an annual basis, at the end of each financial year. You can withdraw your contributions along with the interest thereon after you retire.

Benefits from EPS (Employees’ Pension Scheme)

The EPS scheme gives you pension benefits. You will be eligible for these benefits under EPS if you have completed 10 years of service. And once you have attained 58 years of age, will start receiving a regular pension.

 You get a lifelong pension from EPS, and in case of your demise, your nominee will receive the pension benefits. The monthly pension is calculated with this formula: 

Monthly Pension = (Pensionable Salary x Pensionable Service) ÷ 70

Here, the pensionable salary is the average salary you have drawn over the past 12 months. And pensionable service is the number of years over which you made contributions to your EPS account. This period is rounded off to the nearest year. That essentially means that a period of less than 6 months will be rounded down, while a period of 6 or more months will be rounded up. 

Here are two things to note in this regard:

  • The maximum pensionable salary has been capped at ₹ 15,000
  • The maximum pensionable service has been capped at 35 years

So, the maximum pension you can receive from EPS is limited to ₹ 7,500, which is calculated as follows.

Monthly pension:

= (₹ 15,000 x 35) ÷ 70

= ₹ 7,500

Benefits from Employees’ Deposit Linked Insurance Scheme (EDLI) 

When you open an EPFO account, you are automatically enrolled for the EDLI scheme too. You do not have to complete any minimum service period to qualify for the insurance cover under this scheme. 

In case something untoward happens to you during your service, your nominee is eligible to claim 35 times your average monthly salary (over the last 12 months). Here too, the salary is capped at ₹ 15,000. In addition to this claim, a bonus of ₹ 1.75 lakhs is payable to your nominee. 

For instance, say an EDLI member earns an average salary of ₹ 20,000 over the past 12 months. In case of this member’s demise, the nominee can claim the following amount as insurance benefits: 

Claim amount:

= ₹ 15,000 x 35 

= ₹ 5,25,000

In addition to this, they will receive a bonus of ₹ 1,75,000, bringing the maximum total benefits payable under this scheme to ₹ 7,00,000.

What is the Universal Account Number (UAN) in EPF?

The Universal Account Number (UAN) is a unique 12-digit number given to all members of the Employees’ Provident Fund scheme. It is unique to each employee, and if you have a UAN, it will remain even if you switch jobs. You can use your UAN to transfer your EPF account balance from one employer to another easily.

Your UAN is also useful if you want to withdraw your funds from your account. Want to know more about EPF balance withdrawal and the rules surrounding this? Check out the section below.

EPF Withdrawal Rules

Under some circumstances, you can withdraw your entire EPF balance. And in other scenarios, partial withdrawals may be permitted. Let us take a closer look at each of these separately.

EPF 100% Withdrawal

The entire EPF balance can be withdrawn in the following scenarios:

  • The EPF member has attained 58 years of age 
  • The EPF member is unemployed for two months or more
  • The EPF member has passed away, in which case the nominee can withdraw the corpus 

Note: With effect from December 6, 2018, EPF members can withdraw 75% of the EPF corpus if they are unemployed for one month, and the remaining 25% if they remain unemployed for 60 days or more.

EPF Partial Withdrawal

Apart from the above scenarios, the EPFO allows for partial withdrawal of funds in some special situations, where you may need financial assistance. Check out these circumstances and the associated conditions below.

Scenario: Marriage or education (for yourself, your children or siblings)

  • You should have completed 7 years of service to be eligible for this withdrawal. 
  • You can withdraw up to 50% of your EPF balance.
  • You can avail of this benefit up to 3 times only.

Scenario: Medical treatment (for yourself, your spouse, children or parents)

  • The maximum amount you can withdraw is 6 times your basic salary.
  • This facility can be availed for treatment or surgery for cancer, heart illness, mental ailments, tuberculosis or leprosy.

Scenario: Repayment of home loan (in your or your spouse’s name, or jointly in both your names)

  • You should have completed 10 years of service to be eligible for this withdrawal. 
  • The maximum amount you can withdraw is 36 times your basic salary.

Scenario: Home alterations or repairs 

  • You should have completed 5 years of service (in case of withdrawals for alterations) or 10 years of service (in case of withdrawals for repairs).
  • The maximum amount you can withdraw is 12 times your basic salary.

Scenario: Construction or purchase of a house

  • You should have completed 5 years of service to be eligible for this withdrawal. 
  • The maximum amount you can withdraw is 36 times your basic salary (or 24 times, if you want to use the funds to buy land).

Employees’ Provident Fund Tax Benefits

You can earn a threefold benefit from your Employees’ Provident Fund account. This is what makes this scheme an Exempt-Exempt-Exempt (EEE) option. Let me take you through the tax benefits that you can avail of under the Income Tax Act, 1961. 

Tax benefits on contributions

The contributions that you make towards your EPF account are eligible for tax deduction under section 80C of the Income Tax Act, 1961. As for the employer’s contribution, it is tax-free as long as it is within the 12% limit. 

But the extra amount of employer contribution will be added to your salary and taxed accordingly if your employer contributes more than 12% to your EPF account (if they do, hang on to them!).

Tax benefits on withdrawals

When you withdraw the funds from your Employees’ Provident Fund account, you receive two parts — the investment amount and the interest amount. The investment amount is entirely tax-free if you make your withdrawals after 5 years of continuous service. 

Continuous service involves working under the same employer, or under different employers, provided you transfer your EPF to the new employer. 

Tax benefits on interest

The interest component was also originally entirely tax-free. However, Budget 2021 brought in new rules, effective from April 1, 2021. As per these new rules, the interest amount will be taxable in your hands if the employee’s contribution exceeds ₹ 2.5 lakhs during the financial year. 

But if your EPF contributions are below ₹ 2.5 lakhs during the year, the interest credited is still tax-free. 

Voluntary Provident Fund: Contributing more than 12% to your account

If you don’t mind reducing your take-home salary and want to increase your contribution towards your savings, you can set aside more than 12% of your salary. This goes into your Voluntary Provident Fund (VPF). Here are some of the salient features of this scheme.

  • Your employer has no obligation to contribute to your VPF account.
  • The maximum contribution you can make to this account is up to 100% of your (Basic Salary + Dearness Allowance).
  • The interest rate on this balance is the same as your EPF rate.
  • If you open a VPF account, you cannot close it for a period of 5 years.
  • Only salaried individuals can open a VPF account.

Summing up 

This sums up everything you need to know about the workings of the EPF scheme. As you can see, it is a comprehensive savings avenue launched by the Indian government. By keeping your EPF contribution intact, you can retire comfortably when you reach the age of 58 or so. And now that you know how the EPF works and what tax benefits it offers, you can make the most of your EPF contributions during your working years. 

Frequently Asked Questions (FAQs)

1. What does EPF mean?

EPF is an acronym for Employees’ Provident Fund. It is a savings scheme run by the government of India, which allows you to invest a portion of your wages over the course of your working life. You also get pension benefits and a life insurance cover under the Employees’ Pension Scheme and the Employees’ Deposit Linked Insurance Scheme, respectively. Both these schemes are a part of the EPF scheme.

2. What is the difference between PF and EPF?

PF is short for Provident Fund. It is often used to refer to the EPF scheme itself. So, if you hear the term PF or read about it, it is likely that the term refers to EPF itself. 

On the other hand, if you are referring to PPF or the Public Provident Fund, that is a separate investment scheme backed by the Indian government. It is open to salaried, self-employed, unemployed and retired persons. The EPF scheme, on the other hand, is only for salaried individuals. 

3. Who is eligible for EPF?

Employees with a salary of ₹ 15,000 or lower are eligible for EPF. That said, if you earn more than ₹ 15,000 too, you can register with this scheme, provided you and your employer agree and obtain the Assistant PF Commissioner’s permission. 

4. How can I change my EPF password?

You can change your EPF password by logging into the EPFO Member e-SEWA official website. You will find a dedicated option to change your password on this platform. Simply enter your old password and your new password, confirm the new password, and you should be good to go.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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