Retirement planning is one of our most important financial goals. To ensure some sort of social security, the government devised a retirement scheme in 1952 to help salaried individuals to save for their retirement. Called the Employees’ Provident Fund (EPF) scheme, it entails contributions by both employees and employers towards an employee’s retirement (or EPF) kitty. The scheme is mandatory for those whose salaries are up to Rs 15,000. But most companies offer this to all their employees, as part of their salary package. Let’s take a look at what the EPF scheme is all about.
What is EPFO?
The Employees Provident Fund Organisation (EPFO) is a retirement fund body which was established under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952. It works under the direct jurisdiction of the government and is managed through the Ministry of Labour and Employment. It is overseen by a Central Board of Trustees.
What is the EPF Scheme?
The EPF scheme is a retirement benefit scheme under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952. It is managed by the EPFO.
The purpose of EPF scheme is to promote savings among salaried employees in the country, which can be used after retirement.
Under the EPF scheme an employee has to pay a certain contribution (12 percent) towards the scheme, and an equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer's contribution with interest on both, at the time of retirement.
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Do all employees qualify for the EPF scheme?
The EPF scheme mandatorily applies to all the establishments that have employed a minimum of 20 people. The employers must obtain an EPF registration within one month of attaining the stipulated number of employees.
Establishments with less than 20 employees can also voluntarily become a member of the EPF scheme.
As per the rules of the EPF scheme, an employee earning less than Rs 15,000 per month has to mandatorily become a member of the scheme. Hence all salaried employees earning less than Rs 15,000 per month are eligible.
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An employee whose salary is more than Rs 15,000 a month at the time of joining, is not required to become a member of the scheme. However, such employees can become a member of the EPF by taking the prior permission of the Assistant PF Commissioner and approval from the employer.
What is EPF contribution by the employees and the employers?
Under the EPF scheme, an employee has to pay a certain contribution towards the scheme, and an equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer's contribution with interest on both, at the time of retirement.
Both the employee and the employer make a contribution of 12 percent of the employee’s basic salary towards the EPF. The entire 12 percent contribution made by the employee goes into their EPF account, whereas only 3.6 percent of the employer's 12 percent contribution goes towards the employee’s EPF account. The balance 8.33 percent of the employer’s contribution is diverted to the Employee’s Pension Scheme (EPS) account.
Further, the employees can also opt for a higher voluntary EPF over and above the stipulated 12 percent of basic salary. It is called Voluntary Provident Fund and also earns tax-free interest.
In establishments that employ less than 20 employees, and those in coir, beedi, jute, guar gum and brick industries, the EPF contribution for the Employees EPF account is limited to 10 percent for both the employee and the employer.
The EPFO limit of 10 percent is also applicable for industries that are loss-making and have been declared sick.
What is the interest rate on EPF and how is it calculated?
The annual interest rate on EPF was 8.5 percent for the year 2019-20. The EPFO’s Central Board of Trustees in consultation with the Finance Ministry determines the interest rate of EPF every financial year.
The interest rate is calculated on a monthly basis but is transferred to the employee's EPF account on an annual basis. The interest amount is credited to the employees' EPF account on the 1st of April each year. The money contributed into the EPF account and the interest earned on it are both tax-free.
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What is the Universal Account Number (UAN)?
The Universal Account Number (UAN) is a 12-digit number allotted to each member by the EPFO. The UAN of an employee remains the same even after they switch jobs. The UAN serves as an umbrella for multiple member IDs allotted to an individual by different employers.
The UAN has been made mandatory for all employees and will help in managing the EPF account and even PF transfer and withdrawals. The employees are provided the UAN by the employer. However, in case of switching jobs, the employer has to merely update the employee’s UAN on the portal by using the employee’s KYC details. The UAN is therefore a one-time permanent number which remains the same throughout an individual's employment and need not be changed every time an employee changes jobs.
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When can you withdraw from the EPF? And can you withdraw sooner?
As per the EPF Act, the account holder must attain 55 years of age at the time of retirement to claim the EPF settlement (the employer's, employee's contribution and the interest). However, an account holder can withdraw 90 percent of the EPF of the accumulated EPF balance upon reaching the age of 54.
Further, the EPF balance can be withdrawn partially for funding higher education, wedding, for purchasing property and land etc. The family members of the account holder can also claim the EPF accumulated in case of premature death of the holder.
The employees can withdraw as much as 75 percent of their EPF claim after having been unemployed for one month and the balance 25 percent if he/she is out of work for 60 straight days or more. Before the December 6, 2018 notification by the Labour Ministry, an employee could make such withdrawals only after remaining unemployed for more than 60 days.
What are the tax benefits of EPFO?
The money invested by both the employee and the employer, the interest earned and the money the employee eventually withdraws after the specified period of 5 years is exempted from income tax.
However, withdrawing from the EPF account without completing five years of continuous service invites tax implications for the employee.