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Provident Fund

In 1952, the PF or EPF scheme was introduced under the Employee’s Provident Fund and Miscellaneous Act. All the rules and regulations are defined by the Employee Provident Fund Organisation. The EPFO’s activities are managed by the Ministry of Labour and Employment.

In this process, the employer will collect an amount by deducting it from your monthly remuneration. As you start working in a firm, both you and the organisation contributes 12% of your basic remuneration into the EPF account. This salary includes any dearness allowance provided by the company. You will receive a fixed level of interest on this amount based on the rules set by the EPFO. The total amount that you receive along with the interest is tax exempted.

12% of the salary goes to the EPF account along with 3.67% from your company. The remaining 8.33% of the 12% is sent to the Employee Pension Scheme. In case your salary is above Rs 6500, the company can only contribute 8.33% of that amount to the EPS. The remaining balance amount is credited to your EPF account.

All individuals earning a salary of Rs 15,000 and above have to register under the EPF scheme.

You can withdraw the entire amount from the account after you retire or leave the organisation. In case of your unfortunate demise, your nominee or legal heir can withdraw this EPF amount.

Employer’s contribution to EPF

The minimum rate is 12% out of a salary of Rs 15,000 that is Rs 1800 per month. So, both the company and you will contribute Rs 1800 to the EPF scheme. Apart from this rate, the employer has to pay an additional amount of 0.5% towards the EDLI (Employees Deposit Linked Insurance Scheme) which is an insurance cover. Through this scheme, your nominee will receive a lump sum amount as death benefit after your demise.

There are administrative costs for EPF and EDLI that have to be borne by the employer. A charge of 1.1% for EDLI and 0.01% for EPF is contributed.

Universal Account Number or UAN

Universal Account Number is a 12-digit number, every employer contributing to EPF has. The Employee Provident Fund Organisation (EPFO) allots it. UAN of an employee remains same throughout life irrespective of the number of job he/she changes. Every time an employee switches job, EPFO allots a new member identification number (ID), which will be linked to the UAN. You can put in a request for this new member ID by submitting the UAN to the new employer. Once the member ID is created, it gets linked to the UAN of the employee.

EPF Rate of Interest

The rate of interest for EPF was 8.55% for 2017-18 and has been increased to 8.65% for the financial year 2019. Even though the contributions are deposited on a monthly basis, the interest on these contributions is calculated yearly as per the rates defined by the government. But, the interest will only be collected for the EPF account balance and not for EPS funds.

The rate of interest is valid between the financial year of 2018 and 2019. When a financial year starts, you will have an opening balance in the EPF account that has been accumulated until that point. For the next financial year, the opening balance will be calculated as:

Opening balance + contributions that have accumulated monthly + interest for the previous opening balance along with the contributions

However, if no amount has been forwarded towards the EPF account for a period of 3 years continuously, the account becomes inactive. Retired employees will not receive interest on the amount collected in an inactive account.

EPF Tax Benefits

Your company or employer’s contribution to the EPF account is free from taxes. For your contribution, you can get a deduction of up to Rs 1.5 lakh according to Section 80C of the IT Act.

But, in case you do not wish to be registered under the EPF scheme, you have to opt-out of it at the beginning of your employment. You must notify the company about this by filling out Form 11. In case, you have already registered and have a valid account for EPF, you cannot opt-out.

It is recommended that you do not remove the account for future benefits. It might increase your in-hand salary, but you have to build your future cash reserve in other ways.

Conclusion

EPF is perhaps the easiest way to save money for the future without much hassle. Apart from the pension obtained from the Employee’s Pension Scheme, you also get insurance cover from EDLI. Your EPF account is automatically eligible for this cover and you do not have to contribute anything towards it.

Furthermore, the EPFO invests 5 to 15% of its deposits in ETFs (Exchange Traded Funds). This way, you might get higher returns in future as the interest rates are likely to increase. Therefore, all these factors make EPF a safe retirement planning tool.

If you need any further clarification on this, please feel free to reach us at contact@msassociates.pro or call us on 080-41633750 or 9880542668.