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employee provident fund (epf)
employee provident fund (epf)

Introduction

Any employee in India receives the salary after the employer deducts a certain amount of money as of PF(Provident Fund). One might feel that they are not able to spend their cash-in-hand. However, when a person wants to retire from their job, Employee Provident Fund EPF is one of the main contributions helpful for their living.  The Ministry of Labour regulates EPF schemes in India.

What is an Employee Provident Fund?

Employee Provident Fund EPF is one of the popular savings schemes launched under the supervision of the Government of India. The Ministry of Labour regulates EPF schemes in India. It is the main scheme under the Employee Provident Fund and Miscellaneous Provisions Act,1952. Employee Provident Fund Organisation(EPFO) manages this savings scheme. 

This scheme aims to build a sufficient retirement corpus for an individual. It inculcates the habit of saving money for the salaried class employee. The fund includes monetary contributions from both employer and employee. Each of them has to contribute 12% of the employee’s basic salary (Basic + Dearness allowance) towards this fund every month. Once an individual retires, they receive the entire contribution(of both employee and employer) as a lump sum with interest. The rate of return earned is fixed, which is set by EPFO. Also, the interest accrued is tax-free.

The government of India has mandated contribution in this scheme. Thus, as the government manages it, it is considered to be a low- risk investment.

Monthly Contribution – Employer and Employee

As mentioned above, both employer and employee have an equal contribution towards the employee provident fund. The actual amount to EPF contribution is calculated based on the employee’s basic salary and dearness allowance. For most employees, the PF contribution is 12% of the basic salary. The below is the given details of employee and employer contribution towards EPF:

Employee’s contribution towards EPF

The employer deducts 12% of the employee’s salary (basic + dearness allowance) directly every month for a contribution towards EPF. This entire contribution goes to the EPF account of the employee.

Employer’s contribution towards EPF

Similarly, the employer also contributes 12% of the employee’s salary towards EPF. But, the employer’s contribution has the following categories.

CategoryPercentage of contribution (%)
Employees Provident Fund3.67%
Employees’ Pension Scheme (EPS)8.33%
Employee’s Deposit Link Insurance Scheme (EDLIS)0.5%
EPF Admin Charges1.1%
EDLIS Admin Charges0.01%

However, in certain circumstances, EPF contribution can be 10%. For instance, this can imply in the following cases –

  • If a company has less than 20 employees
  • The company incurs losses that are more than its entire net worth
  • If a company is associated with beedi, jute, brick, guar gum or coir industry

The contribution can also vary in the case of women employees. In the union budget 2018-2019, new women employees can make an EPF contribution of 8% instead of 12%. This privilege is only for the first three years of employment. The primary reason for this revision was:

  • To enable women for higher take-home pay
  • To encourage companies to hire more women to bridge the gap

Even though a woman employee contributes 8% towards EPF, the employer has to maintain its EPF contribution at 12%. Well, an employee can also add more than 12% towards EPF. This is the Voluntary Provident Fund (VPF).

It is important to note that EPF will continue to be active as long as you are a salaried employee. If you switch jobs, it is paramount to update your EPF information with your new employer to continue their contribution.

Employee Provident Fund Interest Rate

The current interest rate for EPF for the financial year 2020-2021 is 8.50%. This interest rate is calculated every month and then transferred to the Employee Provident Fund accounts every year on 31st March. The interest earned on EPF is exempted from tax.

This rate is pre-decided by the Government of India(GOI) along with the Central Board of Trustees(CBT). CBT regulates the Act. The interest rate which is announced by GOI stays valid for a financial year, i.e. starting from 1st April of one year to 31st march year ending of next year.

If there is no contribution in the EPF account consecutively for three years, then the account becomes inactive or dormant. Even in such instances, the interest is paid on the EPF account until the employee retires. However, for retired employees, the interest is not paid on inoperative accounts. The interest earned on inoperative accounts is taxable as per the employee’s tax slab rate.

Subsequently, the employer’s share contributed towards the Employee Pension Scheme(EPS) does not accrue interest. However, a member is eligible to receive its pension only after the age of 58.

Employee Provident Fund Tax Implication

The contributions made in EPF are tax exempt. This fund falls under the EEE Exempt-Exempt-Exempt taxation regime. This means that no tax is levied at the time of contribution, accrual of interest and withdrawal at the time of maturity if it is within a specific limit. However, there are rules and exceptions to be checked.

Employer Contribution

Employer’s contribution towards EPF is tax exempted up to a certain limit. As per the new budget 2020, it has proposed a new limit towards the employer’s contribution.

As per the new proposal, the employer’s contribution to EPF, National Pension Scheme and superannuation fund on an aggregate basis should not exceed Rs.7.5 lakh in the financial year. Suppose, if the aggregate amount exceeds the proposed limit, then the additional amount is taxable in the hands-on employee.

Employee Contribution

Employee’s contribution towards EPF and interest is exempted from tax. One can claim tax deduction under section 80C up to a limit of 1.5 lakhs. If the amount from PF is withdrawn at maturity, then no tax has to be paid. However, suppose the employee withdraws any partial amount due to any emergencies. In that case, the amount will be taxable to the employee.

Tax on Withdrawal

EPF balance withdrawal is considered to be tax-free. As per the rule, there are certain exceptions based on the number of years of employment.

Before five years

Suppose the employee has not completed a consecutive five years of service. In that case, the amount withdrawn is taxable in the hands of the employee in the year of receipt. The amount may remain tax-free in the following two exceptions.

  • Firstly, if the employment is terminated due to an employee’s ill health, the employer has discontinued its business or any other reason for withdrawal which is beyond the control of the employee. In such a scenario, the EPF amount withdrawn before five years of employment is considered to be tax-free in the hands of the employee.
  • Secondly, suppose the employee changes his employer in less than five years. In that case, the employee can transfer his PF account balance for the existing employer to the new employer. In this case, the PF balance remains tax-free.

Therefore, it is always suggestible to transfer the PF balance while changing jobs to avoid any taxation.

After five years

Suppose the employee has completed a consecutive five years of service. In that case, the amount withdrawn is tax-free in the hands of the employee in the year of receipt.

Otherwise

  • Suppose the EPF withdrawal amount is less than Rs.50,000 before completion of 5 years of service, in such instances. In that case, the individual has to pay tax on the EPF withdrawal amount if he falls in the taxable bracket(based on this tax slab rate).
  • Suppose the EPF withdrawal amount is more than Rs.50,000 before completion of 5 years of service, in such instances. In that case, TDS (Tax Deducted at Source) is deducted. If PAN card is furnished, then 10% TDS is charged. If PAN card is not submitted, then TDS is at the maximum marginal tax rate. However, No TDS if Form 15G/15H is submitted.

EPF Withdrawal

Every month a certain amount is deposited in the PF account. This amount keeps earning interest and forms a large corpus. At the end of the employment, a substantial amount is collected in the EPF account to help an individual to meet their financial needs during their retirement period.

When an individual retires at the age of 58, 100% of the corpus can be withdrawn. If a person has attained an age of 54 or above, one can withdraw 90% of its EPF corpus before one year of its retirement. Even though EPF is considered to be a retirement savings scheme, funds can be withdrawn in case of certain exceptions.

Premature Withdrawal on an emergency

Premature PF withdrawals are also allowed in case of financial emergencies. One can withdrawal only after a period of 5 years of completion of service. In the following examples where one can avail partial withdrawal:

  • Wedding
  • Higher education
  • Purchase of a land/house
  • Medical emergency
  • House loan repayment
  • Renovating a housing property

Withdrawal due to unemployment

EPF withdrawal is also available in case of unemployment while changing jobs. In case an individual resigns for its role and remains unemployed for a month, one can withdraw 75% of its PF corpus to meet its expenses. If an individual remains unemployed for more than two months, then one can withdraw the balance EPF amount. In the case of unemployment, this feature can be used anytime. One need not wait for the completion of a certain number of years for withdrawal of EPF amount. 

Thus, these withdrawals can be claimed through the different composite forms that are available on EPFO e-portal.

Voluntary Provident Fund

Voluntary Provident Fund(VPF) is another simplified version of the traditional provident fund. It is another savings scheme for building a retirement corpus. It is also known as the Voluntary Retirement Fund. Only salaried employees are eligible to invest in this scheme.

Meaning and Scheme

As the name suggests, VPF is a voluntary contribution from the employee towards their provident fund account. In this scheme, it is not mandatory for a 12% contribution by the employee towards their provident fund. However, employees can do it voluntarily. An employee can also contribute up to 100% of their basic salary and dearness allowance in this scheme. The employer does not need to contribute to this scheme; it solely depends on the employer’s choice for any additional contribution.

The interest of VPF is similar to the EPF scheme. The rate of interest of VPF is decided by the Government of India every year. Employers or employees do not need to contribute to this fund. Also, this fund has a lock-in period of 5 years. In case, the contributor wishes to withdraw money(fully or partially) before completion of 5 years; then this amount is subject to taxation.

Withdrawal

Generally, when an employee retires or resigns from a job, the entire amount in the fund is payable. In case of the untimely death of the account holder, the nominee can claim the amount in VPF. The main benefit of this fund is that it allows withdrawals anytime.

Furthermore, VPF also allows partial withdrawal as loans. In case of any unforeseen financial circumstances, employees can withdraw from their VPF account. For instances, some of the reasons can be –

  • Payment of loans
  • Wedding
  • Children education
  • Medical emergency
  • Purchase of new house/land
  • Payment for housing loan

However, if one withdraws the amount before five years, then it is taxable in the hands of the employee. Vice-versa, if one withdraws the amount after five years, the taxation is the same as EPF. Similarly, it falls under the EEE taxation regime. However, the exemption is only up to a limit of INR 1.5 lakhs under Section 80C only.

Benefits of Employee Provident Fund

The EPF scheme is one of the most popular and largest saving schemes in India for all salaried class employees. The following are a list of benefits of this scheme –

Tax saving scheme

The investment amount and the interest income are exempt from tax. The amount accumulated also remains tax-free if withdrawn after completion of 5 years. However, in case of premature(before five years) withdrawal, it will be taxable in the hands of the employee.

Capital appreciation

The Government of India fixes the interest rate of this scheme. The contribution to this fund happens monthly. Thus, it is not a burden to the employee to make a lump sum investment at once. As the money and interest keep adding, the compounding effect creates a vast corpus at the retirement age.

Retirement corpus

In the long run, this scheme helps to build a sufficient retirement corpus. This corpus helps the retired employee to have a sense of financial security and independence.

Financial Emergency

This accumulated fund can be used for any unforeseen events that occur in life. The employee can partially withdraw from this fund for any exceptional cases.

Unemployment

If the employee loses his job, this fund can be used to meet his expenses. One can withdraw 75% of the accumulated fund after one month of unemployment. The remaining 25% of the fund can be withdrawn after two months of unemployment.

Death

In case of death of the employee, the accumulated EPF fund amount is transferred to the nominee to help the family in difficult times.

Easy Access

The Universal Account Number(UAN) provides easy access to the employees to their PF account via the EPF member portal. They can transfer their PF account whenever they change jobs.

Check EPF Balance

The government of India has made it very easy for the employees to check their EPF account balance. One can do a balance check of their EPF account  through various ways. Following are the different ways to check EPF claim status:

Umang App

The Umang(Unified Mobile Application for New-age Governance) app has been launched by the Government of India to drive mobile governance in India. It provides a single platform for all Indian citizens to access various e-government services.

Besides, this app helps in checking your EPF balance through UAN Number. One can view their EPF passbook, raise a claim (E.g., withdrawal of PF amount) and track EPF claims. One can register on the app by getting a one-time password sent to their respective mobile number. Also, through this app the EPF claim status can be tracked. It is essential to link Aadhaar card to Umang App and UAN Number.

Missed Call

Any member can  do a balance check of their EPF account by giving a missed call to 011-22901406 from their registered mobile number. Importantly, to avail this service, one has to link their UAN number with their KYC details, i.e. Aadhaar card or Pan Card or Bank Account details such as account number, ifsc code, etc. 

Few things to keep in mind –

  • One should have a UAN compulsorily.
  • UAN should be activated
  • One should give their correct mobile number at the UAN portal. If the mobile number has been changed, the same has to be updated on the UAN site.
  • One should call from their registered mobile number only.

After a missed call, one will receive an SMS from AM-EPFOHO. EPFO sends a reply to the missed call as an SMS. This SMS contains the following details of the EPF account –

  • UAN Number
  • PF Number
  • Name
  • Date of Birth
  • EPF Balance
  • Last PF Contribution

Text

If the UAN is registered with EPFO, then you can send an SMS to 7738299899 from your registered mobile number for checking your EPF balance. The message has to be sent in this format – “EPFOHO <UAN> <LAN>”. The first three letters of the preferred language have to be written followed after UAN. (E.g., MAR for choosing the Marathi language). This facility is available in 10 languages. They are English (default), Hindi, Punjabi, Gujarati, Marathi, Kannada, Telugu, Tamil, Malayalam, and Bengali. EPFO sends the details on SMS as per its records.

Employees Provident Fund Organisation EPFO Website

Employees Provident Fund Organisation EPFO  is the largest social security organization of India. It was formed by the Government of India. EPFO plays a significant role in helping its members in different ways.

It has its website where members can register with their UAN number. One can check their PF passbook balance of their EPF account online. One can download or print their EPF passbook. The following are the steps to verify your PF balance –

  1. Visit the EPFO website – www.epfindia.gov.in.
  2. Click on ‘Our Services’ and select ‘For Employees’
  3. Click on ‘Services’ and choose the ‘Member Passbook’ option.
  4. Type the UAN and password to view passbook

It is important to note that the employer has activated UAN. Though the EPFO provides the UAN, the employer needs to verify and activate it to access the EPF account online.

What are the documents required needs for EPF registration? 

The documents required by employees to register for EPF scheme are:

  • ID proof (Aadhaar Card/ PAN Card)
  • Bank A/c number with IFSC code
  • Voluntary application

What are the other tax saving investments under Section 80C?

To check their tax liability while filing income tax returns, one can use an income tax calculator. 

Scripbox Income Tax Calculator helps in checking if there is any additional scope to save more tax so that investors can get maximum tax benefits on their investments. Scripbox’s Income Tax Calculator, helps investors to derive maximum benefits by suggesting tax saving investments. They can claim the same while filing income tax returns. 

What is a composite claim?

A composite claim is a combination of different forms, used for the withdrawal of money from EPF offline. This EPF form combines Form 19, Form 10C, and Form 31. Individually, Form 19 is for PF final settlement (claim form); Form 10C is for pension withdrawal, and form 31 is for partial PF withdrawals.

However, suppose an individual has its UAN linked with an Aadhaar card and bank account. In that case, they can submit this single form directly to EPFO without employer attestation. Similarly, if UAN is not linked to Aadhaar card and bank account, then employer attestation is required on the form.

Conclusion

EPF comes under Employee Provident Fund and Miscellaneous Provisions Act,1952. EPF is an excellent saving scheme for building a sufficient retirement corpus for salaried employees. Over the career time, one shifts a job multiple times. But, the benefit of this scheme is added continuously under UAN. EPF can be a good investment plan as it also comes with tax benefits. It ensures higher earnings and improves savings for employees in the long-term.

However, there are certain limitations, as well. There can be a better investment plan or alternative, which is an ELSS fund (tax saver fund).  ELSS fund is a type of equity funds that helps investors get inflation-beating returns for retirement. With tax-saving and lower lock-in period high returns, this tax saver fund attracts many investors.

Frequently Asked Questions

What is UAN?

EPFO has introduced a 12-digit number for all employees holding an EPF account called Universal Account Number(UAN). This number helps in transferring the PF account from one employer to another. With UAN, there is no dependency on any employer for the withdrawal of the PF amount.

What is pdf withdrawal form 31?

A PF withdrawals form 31 is also knows as PF advance form. This EPF form is for partial withdrawal of funds or claim advance from the EPF account. An individual cannot withdraw the amount as when required. Likewise, withdrawal is available in special conditions only.
One can withdraw partial amounts in case of any financial emergencies like marriage, payment of a loan, higher education, purchase of land/house etc.

What is PF Form 19?

Form 19 is a claim form that helps individuals to claim their EPF amount. One can use this form is mainly for two purposes. Firstly, when the individual wants to withdraw the full amount in the form of full settlement. When an individual quits a job, they can either close/settle their PF account or transfer it to the new employee. Secondly, one can use this form to withdraw the sum when they retire.
One can use this form for EPF claims. However, only after two months of leaving a job or retirement.

What is form 10D?

Under the EPF scheme, an EPFO member becomes eligible to receive a pension at the age of 58 years. Form 10D helps in pension withdrawal post-retirement. One has to fill the form 10D offline and submit it to EPFO. 

Published on September 1, 2020