Employees Provident Fund: A Detailed Description
Created on 03 Oct 2020
Wraps up in 7 Min
Read by 2.9k people
Updated on 10 Sep 2022
Are you also the one who gazes at expensive vehicles on the road and wishes to own it one day? There would hardly be anyone who doesn't want these classy-stylish vehicles in their parking. Whether it is Rolls Royce, Mercedes, BMW, Audi; all make you stop and stare at them.
While various business people could manage to fulfil their dreams of owning keys to these cars but in the service line, it still seems to be a distant dream. Middle-class employees work wholeheartedly through their service period and earn, but at the time of retirement, there still remains some gap in the amount between their savings and desires. This is where the Employees Provident Fund steps in.
Your desires are never-ending, but your job will definitely come to an end. Therefore, it is important to know the concept of the Employee Provident Fund. So, let's jump in and get a deeper understanding of the Employees Provident Fund.
What is an Employees Provident Fund?
Among various schemes out there, the Employees Provident Fund is one that enables people to save a corpus for their retirement. This plan was introduced with the Employee Provident Funds Act in 1952. And today, it is managed and monitored by the Employee Provident Fund Organization (EPFO).
Wondering how this corpus for retirement is developed?
Around 12% ( of the basic salary) is the rate at which the employee has to contribute to the Employee Provident Fund. With an equal contribution, the employer also contributes that same amount. When a person retires, he or she receives a total amount which includes his/her personal as well as the employer's contribution.
The fetching thing in this is that the employee receives the lump sum amount with interest. Therefore, it works in favour of the employee from all dimensions. Also, EPF is managed and overseen by the Government of India, which assures the fixed rate of return; hence it is regarded as a low-risk investment.
It is mandatory for the companies that have a minimum of 20 employees to maintain the Employee Provident Fund accounts. Some companies with fewer than 20 employees also opt for the EPF scheme.
Another requirement from the side of an employer is that if they have staff who receives salaries less than Rs. 15,000, then the Employee Provident Fund comes in as an obligation for them. However, most companies provide the facility to all employees regardless of their salary.
Now the question that comes hand in hand with the EPF system is, what if the employee changes his/her job? If you change your jobs frequently and are concerned about how your EPF will be fixed, the Universal Account Number is something that comes as a solution to this.
Universal Account Number
What if the employee leaves his/her job in between? What will happen to the EPF of that Employee? Will they be able to claim their amount?
The answer to all these questions is just a 12-digit number, the Universal Account Number (UAN). A UAN is allotted by the Employees Provident Fund Organization to every employee that has an EPF account. This number remains constant throughout the life of an employee and is portable too.
The benefit of this number comes in when an individual plans to change his/her job. You do not need to withdraw your EPF when you change your job. You can transfer your EPF from one employer to another, and hence you can continue building your EPF corpus without a break.
Employees Provident Fund Monthly Contribution: A Deeper Understanding
It has already been mentioned above that both the employer and the employee have to contribute equally to the EPF accounts every month. But the system is not that easy as it seems to be.
The final amount of Employees Provident Fund is generated on the basis of basic salary, but in calculations, Dearness Allowance and Retaining Allowance are also considered.
Dearness Allowance is a calculation on inflation and Allowance paid to government employees, public sector employees, and pensioners in India. It is calculated as a percentage of Indian citizen's basic salary, to mitigate the impact of inflation on people.
Retaining Allowance is given to an employee for retaining their services till the time their establishment is not working. This Allowance is payable to the employee of any factory, organisation, or establishment.
Now you must be thinking, is 12% the only EPF rate?
Well, this is not the case. There are certain circumstances where the EPF rate is lower than 12%. In such cases, the EPF rate is 10%. If the company is meeting the following requirements, then it is allowed to give a 10% rate on EPF:
- The employee count must be less than 20.
- The losses faced by the company are more than the net worth.
- The company must be belonging to the Beedi, Jute, coin or brick industry.
Another case where the EPF is less than 12% is when there are women employees in the company. Women employees are allowed to contribute only 8% towards their EPF account for the first three years of their employment. There are two reasons for such deduction; firstly to encourage companies to hire more women. Secondly, for women to get a higher take-home pay.
Above mentioned cases were the ones where the Employee Provident Fund rate is lower than the actual rate, 12%.
Now, what if you want to contribute more than 12% towards your EPF? It is the point where the Voluntary Provident Fund (VPF) comes in to help.
What is Voluntary Provident Fund (VPF)?
The Voluntary Provident Fund (VPF) is the one in which the contribution from an employee's side is made voluntarily. The contribution is more than the general 12% contribution that an employee makes towards their EPF.
The maximum contribution from an employee's side in the Employees Provident Fund is 100% of basic salary plus Dearness Allowance. In that case, the employee will be getting the interest as per that particular amount. Isn't that great?
Well, if you are an employer, then don't worry as you are not obliged to match this voluntary contribution. So, the concept of Employee Provident Fund is justifiable for both employees as well as employers.
Now maybe you can see your desired vehicle dreams coming true. Whether it is BMW or Mercedes Benz, it can be yours anytime. You are just a decision away!
EPF: Rate of Interest, Tax Benefit, Withdrawal
Let us now understand some of the basic concepts that are important to understand the current, existing EPF system in India.
Rate of Interest
Currently, the prevailing rate on EPF deposits is 8.65%, which is the same for VPF. These rates of interest are reviewed every year. Last year also it was 8.65%.
EPF Tax Benefits
Exempt, Exempt, Exempt is the category under which the Employees Provident Fund comes with regards to tax. As the contributions are deductible from income, it enjoys the EEE status.
Here, the great thing is that you won't be obliged to pay taxes on the money you invest in EPClF, the interest you have earned, or the amount withdrawn at the time of retirement. But these facilities are not available if you plan to withdraw EPF before the completion of 5 years. Tax benefits are the same as in the case of VPF.
As the main aim behind the Employees Provident Fund is financial security even after retirement, no individual can withdraw the amount before the age of 54 years. At the age of 58 years, you can extract 100% of your EPF corpus.
Under What Circumstances EPF Can be Withdrawn?
So one of the best things about EPF is that it can be withdrawn either completely or partially. But in both cases, there are certain circumstances under which it can be withdrawn. Let's just have a quick look at these circumstances.
EPF can be withdrawn completely in the following situations:
- At the time of retirement.
- If the individual remains unemployed for more than two months.
EPF can be withdrawn partially in the following situations:
- At the time of marriage.
- At the time of higher education.
- At the time of repayment of home loan.
- At the time of the renovation of a housing property.
What is the Process of EPF Withdrawal?
The employees can withdraw EPF either offline or through the online portal. They just have to submit the withdrawal application.
For the offline submission of application:
- The individuals are required to fill a 'new composite claim form' or 'composite claim form'. And this form is required to be submitted to EPFO office, under their jurisdiction.
- This composite claim form must be attested by the employer as well.
For the online submission of the application:
- Universal Account Number (UAN) of the individual is a must for online submission.
- The mobile number which has been used to activate the UAN should also be active.
- Other requirements say UAN should be linked to Aadhar. The bank details, PAN, and IFSC code should also be there.
- After confirming that all the conditions are met, the individuals are required to login to the online portal.
- After verifying their KYC details, the individuals can proceed with further instructions.
With the system of Employees Provident Fund, one can plan their life after retirement with the same standards and lifestyle with which they live today. All your desires of having a car, owning a house, a trip/trips abroad, etc., could be a reality if you make wise decisions regarding your EPF.
Even if you are a person who has faced various job insecurities and have moved between jobs quite often, the EPF is something which can save you from wandering away from your desires and lets you enjoy your old age by helping you live with the same charisma, enthusiasm, and fun and that too without depending upon anyone else.
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