EPF: The Basics
The Employees' Provident Fund (EPF) is a crucial retirement savings scheme in India, governed by the Employees' Provident Funds and Miscellaneous Provisions
Act of 1952. Managed by the Employees' Provident Fund Organisation (EPFO), it applies to establishments with 20 or more employees, with some exceptions. The core principle involves contributions from both the employee and the employer, building a corpus that is paid out with interest upon retirement. This article offers a comprehensive overview of the EPF, clarifying its key features, eligibility criteria, and operational mechanisms. It helps individuals navigate the complexities of this important financial tool.
Contributions Explained
The EPF scheme mandates contributions from both the employer and the employee. The employer's contribution is 12% of the employee's basic wages, along with dearness allowance and any retaining allowance. Employees also contribute an equivalent amount. However, for establishments with fewer than 20 employees, or those meeting specific EPFO criteria, the contribution rate for both parties can be reduced to 10%. For instance, if an employee's basic salary is ₹30,000 per month, both the employee and employer contribute ₹3,600 monthly towards the EPF. It's important to note that not all of the employer's contribution goes directly into the EPF. A portion, specifically 8.33%, is allocated to the Employees' Pension Scheme (EPS), though it's calculated on a maximum of ₹15,000. This means that for employees earning ₹15,000 or more, ₹1,250 is diverted to EPS each month. If the basic pay is less than ₹15,000, 8.33% of that full amount will go into EPS. The remainder is retained within the EPF scheme. At retirement, the employee receives their own contributions, along with the balance of the employer's share within the EPF account.
Voluntary Contributions
Employees have the option to boost their retirement savings through Voluntary Provident Fund (VPF). This allows employees to contribute more than the standard 12% of their basic pay. These additional contributions are managed separately and accumulate tax-free interest, making VPF an attractive option for those wanting to save more. Importantly, employers are not obligated to match these voluntary contributions, providing employees flexibility in their savings strategy.
EPF Withdrawals Defined
As per EPF regulations, final settlements are typically available upon retirement after the age of 55. The total EPF balance includes both the employee's and employer's contributions, along with accrued interest. However, provisions exist for partial withdrawals before retirement. Individuals over 54 can withdraw up to 90% of their accumulated balance, including interest. Premature withdrawals are possible, but they are subject to specific conditions. Since December 6, 2018, employees can withdraw 75% of their EPF corpus after one month of unemployment, and the remaining 25% after being out of employment for 60 days or more. Prior to this date, an employee could only make withdrawals after being unemployed for more than 60 days. To facilitate withdrawals, individuals can use the 'UAN based Form 19', which may remove the employer's signature requirement, streamlining the process.
Interest Accrual Process
Interest in the EPF scheme is calculated monthly based on the running balance. This method ensures that interest is compounded over time, contributing to the growth of the EPF corpus. The interest rate is declared annually by the EPFO and is credited to the EPF account at the end of each financial year. This regular crediting of interest makes EPF a valuable tool for long-term savings, providing a steady return on investment.
UAN: The Key
The Universal Account Number (UAN) is an essential element of the EPF system, issued by the EPFO. The UAN serves as a centralized identifier, linking multiple Member IDs from different establishments under a single umbrella. This simplifies account management and makes it easier for members to view details of all linked Member Identification Numbers. Having a UAN is crucial for EPF management, enabling easier PF transfers and withdrawals. In many cases, employers provide the UAN, which employees then activate. If changing jobs, employees can provide their UAN to the new employer. It is a permanent number that remains constant throughout a career. When starting a new job, providing the 'New Form No. 11- Declaration Form' with the existing UAN is the first step. If a UAN is not available, provide the previous PF number along with the exit date from the prior job.
Five-Year Rule's Importance
The five-year continuous service rule is important when it comes to EPF. Employees who change jobs early in their careers have two primary options for their EPF: they can withdraw a portion of the corpus after a period of unemployment or transfer the balance to the new employer. The tax implications are significant: EPF withdrawals are not taxed if at least five years of continuous service have been completed. However, withdrawals within five years have tax implications. The total employer contribution and the interest earned are taxable in the year of withdrawal. Additionally, deductions claimed under Section 80C on one's contribution will be added to the income. Furthermore, interest earned on the employee's contribution is also subject to tax. However, from June 1, 2016, the threshold for Tax Deducted at Source (TDS) on PF withdrawals was raised from ₹30,000 to ₹50,000. If a PAN card is provided, TDS is applicable at a rate of 10%. With effect from April 1, 2020, interest becomes taxable if an employee's own contribution in a financial year exceeds ₹2.5 lakh, and the tax applies only to the excess.
EPF Advances Explained
EPF contributions are primarily designed for retirement, but the EPFO allows access to funds even during employment through 'advances'. These are permitted under specific circumstances, such as purchasing a house, repaying a home loan, or covering medical expenses, education, or marriages. The advance amount depends on the situation and years of service. Unlike loans, no interest is charged, and repayment isn't necessary. If you have an active UAN linked to your bank account, you can apply directly to the EPFO using UAN Based Form 31, avoiding the need for employer involvement. Otherwise, Form 31 needs to be submitted through the employer. Advances can be taken for a variety of purposes including buying or building a house, buying land, repaying home loans, medical treatments, and the education or marriage of family members. Moreover, two non-refundable advances are permitted to address financial emergencies related to the pandemic (e.g. Coronavirus) since March 27, 2020.
Housing Scheme Details
The EPFO has introduced a scheme allowing members to use up to 90% of their EPF savings for down payments on homes and to pay home loan EMIs. To qualify, members must be part of a registered housing society with at least 10 members. The funds can be used for outright purchases, down payments, buying plots, or building a house. The transactions can be done via central/state governments, or from private builders. Only members with three years of EPF membership are eligible for this scheme. This provides a significant advantage, particularly for those looking to invest in real estate.
Key Takeaways
EPF offers significant benefits, with sovereign backing and tax-free interest, subject to specific conditions. Contributions are deductible from income before tax under Section 80C, and the total corpus is exempt from tax upon maturity. Financial experts generally advise transferring EPF accounts when changing jobs and avoiding withdrawals until retirement to maximize benefits. Understanding the EPF scheme's nuances is vital for effective financial planning, ensuring that you make informed decisions about your retirement savings.
