Employee Provident Fund (EPF), one of the most popular savings schemes launched by the Government of India, is governed by the Ministry of Labour. EPF is the primary scheme established by the Employee Provident Fund and Miscellaneous Provisions Act of 1952. The Employee Provident Fund Organisation (EPFO) manages the savings scheme.
The provident fund (PF) scheme aims to provide an individual with a sufficient retirement corpus and instils the habit of saving money in salaried employees. The fund comprises monetary contributions from both the employer and the employee. Every month, they must contribute 12% of the employee’s basic salary (Basic + Dearness allowance) to this fund. When a person retires, they receive the entire PF contribution (from both the employee and the employer) as a lump sum with interest. EPFO determines the rate of return on investment. In addition, the interest earned is tax-free.
The Indian government has mandated employee participation in this scheme. This scheme is a low-risk investment because it is managed by the government. Let’s check out in detail how vital PF contributions are.
Table of Contents
Employees and employers both contribute equally to the EPF. The employee’s base salary and dearness allowance determine the actual amount of EPF contribution. The PF contribution is 12% of their basic wage for most employees. The details of employee and employer contributions to EPF are as follows:
PF contribution of employees
Every month, the employer deducts 12% of the employee’s salary (basic + dearness allowance) as an EPF contribution. This entire contribution is deposited into the employee’s EPF account.
PF contribution of employers
Similarly, the employer contributes 12% of the employee’s salary to the EPF.
Contribution Rate for EPF in 2021
In some cases, PF contributions can be as high as 10%. For example, consider the following scenarios:
- If a business has less than 20 employees,
- The company suffers losses that exceed its total net worth.
- A business involved in the beedi, brick, jute, guar gum, or coir industries.
In the case of female employees, the contribution can vary. As per the Union Budget 2018-2019, new female employees can contribute 8% rather than 12%. This benefit is only available for the first 3 years of employment.
The primary reason for this revision was as follows:
- To allow women to earn more money at home.
- To encourage companies to employ more women to close the gender gap.
Even if a women PF contribution is 8%, the employer must maintain it at 12%. Employees can also contribute more than 12% to their EPF through the voluntary provident fund (VPF).
An EPF account remains active as long as an individual is employed. If you change jobs, you must update your EPF information with your new employer so that they can continue to contribute.
Implications of EPF Taxation
PF contributions are tax-free. This fund is taxed under the Exempt-Exempt-Exempt (EEE) regime. No tax is levied at the time of contribution, interest accrual, or withdrawal at maturity if it is within a certain limit. However, some rules and exceptions follow.
Contribution from the Employer
Employer contributions to EPF are tax-free up to a certain limit. According to the new budget 2020, a new limit on the employer’s contribution has been proposed.
As per the new proposal, the employer’s total contribution to EPF, National Pension Scheme, and superannuation fund should not exceed Rs 7.5 lakh in a fiscal year. If the total amount exceeds the proposed limit, the excess amount is taxable for the hands-on employee.
Contribution of Employees
EPF contribution and interest are tax exempt. A tax deduction of up to 1.5 lakhs can be claimed under Section 80C. If the amount from the PF is withdrawn at maturity, no tax is due. However, suppose the employee withdraws a portion of the funds due to an emergency. In such a case, the employee is taxed on the amount.
The withdrawal of an EPF balance is tax-free. However, there are few exceptions to the rule based on the number of years of employment.
What exactly is an EPF calculator?
The EPF calculator is a simulation that reveals how much money will accumulate in your EPF account when you retire. You can calculate the lump sum amount, which incorporates both your contribution and the employer’s contribution, as well as the investment’s accrued interest.
The EPF calculator includes a formula box to enter your current age, basic monthly salary and dearness allowance, PF contribution, and retirement age up to 58 years. If you know the figures, you can enter the current EPF. The EPF calculator will show you the EPF funds available at retirement after entering the necessary information.
The Employee Provident Fund and Miscellaneous Provisions Act of 1952 governs EPF calculation and dispersal. EPF is an excellent savings plan for accumulating a sufficient retirement corpus for salaried employees.
Throughout an individual’s career, the person may change jobs several times. However, the benefits of this scheme are continuously added under UAN. A PF contribution can be a good investment strategy because of its tax benefits. The PF ensures higher earnings and increases long-term savings for employees.
However, there are some limitations in PF contribution as well. An ELSS fund may be a better investment strategy or alternative (tax saver fund). An ELSS fund is a type of equity fund that assists investors in achieving inflation-beating returns for retirement. This tax saver fund attracts numerous investors because it saves money on taxes and has a shorter lock-in period.
FAQs on PF Contribution
What is the mission of EPFO?
EPFO's mission is to provide social security to the country's workforce. It is the world's largest social security organisation, according to maps.
What is UAN?
EPFO has implemented a 12-digit number known as the Universal Account Number (UAN) for all employees with an EPF account. When transferring a PF account from one employer to another, this number is required.
What is PF withdrawal form 31?
A PF withdrawal Form 31, also known as a PF advance form, is used to withdraw funds or make a claim advance from an EPF account. Individuals cannot withdraw funds as needed. Similarly, withdrawal is only available under certain conditions.
What is PF Form 19?
Form 19 is a claim form that assists individuals in claiming their EPF balance.