No matter what kind of investor you are, you’ll agree that your financial plan should include the following three key objectives:
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.
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.
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.
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 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.
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.
This part is fairly straightforward. If you are an eligible employee, 12% of your salary will go directly into the EPF scheme each month.
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 —
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.
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:
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.
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.
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.
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.
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.
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.
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:
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
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.
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.
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.
The entire EPF balance can be withdrawn in the following scenarios:
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.
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)
Scenario: Medical treatment (for yourself, your spouse, children or parents)
Scenario: Repayment of home loan (in your or your spouse’s name, or jointly in both your names)
Scenario: Home alterations or repairs
Scenario: Construction or purchase of a house
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.
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.
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.
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.
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.
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.
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.
