What is Employee's Provident Fund (EPF)

An employee working in a corporate organization must be aware of the Employees Provident Fund. This is a government scheme set up under the Employees Provident Funds and Miscellaneous Provisions Act, 1952.

In this article, we will be learning everything about the Employee Provident Fund (EPF) that an employee working in a private organization must be aware about.

Starting with what is EPF? It is a fund set up under the government where an employee contributes a part of his/her salary every month and an equal amount is contributed by the employer. On retirement or on other cases the employee gets the sum of his contribution, his employer’s contribution, and interest thereon.

Is there any compulsion for EPF? Yes, it is a compulsion for the employer who has 20 or more employees, to contribute towards the EPF. As per rules, if an employee draws more than Rupees 15,000/- per month on the joining, he/ she can opt for EPF, as this is not mandatory for them. But for those earning less than Rupees 15,000/- per month at the time of joining the organization must mandatorily contribute to the fund.

How does this scheme work? An employer has to pay an equal amount to 12 percent of the basic salary of the employee (“Basic salary” here means the sum of Basic Salary, Dearness Allowance (D.A.) and retaining allowance, if any) and equal contribution is made by the employee too. For most of the private sector employees, it is contributed only to the Basic Salary. (For Example, my basic salary is Rs. 15,000/- thus 12 percent of it i.e., Rs. 1,800 will be deducted from my total salary and deposited in the EPF account along with Rs. 1,800 contributed by the employer every month)

However, an employee’s EPF account will not get the full credit of the employer’s contribution to his fund because 8.33% of the Employers contribution will be directed to the Employee’s Pension Scheme (EPS). The maximum amount to be contributed to EPS has a limit of Rupees. 15,000 a year i.e. Rs. 1,250 per month. Thus, 8.33% of the employer’s contribution or Rs. 15,000/- whichever is higher will be diverted from the employer’s contribution fund to EPS. Please refer to the table below for more clarity on this with 2 options.

Option 1. Where the Basic Salary of Employee ‘X’ is 20,000.

Year	Month	Basic Salary	Employees Contribution	Employers Contribution	Contribution to EPS
2019	April	20,000	2,400	1,150	1,250
2019	May	20,000	2,400	1,150	1,250
2019	June	20,000	2,400	1,150	1,250
2019	July	20,000	2,400	1,150	1,250
2019	August	20,000	2,400	1,150	1,250
2019	September	20,000	2,400	1,150	1,250
2019	October	20,000	2,400	1,150	1,250
2019	November	20,000	2,400	1,150	1,250
2019	December	20,000	2,400	1,150	1,250
2020	January	20,000	2,400	1,150	1,250
2020	February	20,000	2,400	1,150	1,250
2020	March	20,000	2,400	1,150	1,250
Total		240,000	28,800	13,800	15,000

 

Option 2. Where the Basic Salary of Employee ‘Y’ is 10,000.

Year	Month	Basic Salary	Employees Contribution	Employers Contribution	Contribution to EPS
2019	April	12,000	1,440	1,320	120
2019	May	12,000	1,440	1,320	120
2019	June	12,000	1,440	1,320	120
2019	July	12,000	1,440	1,320	120
2019	August	12,000	1,440	1,320	120
2019	September	12,000	1,440	1,320	120
2019	October	12,000	1,440	1,320	120
2019	November	12,000	1,440	1,320	120
2019	December	12,000	1,440	1,320	120
2020	January	12,000	1,440	1,320	120
2020	February	12,000	1,440	1,320	120
2020	March	12,000	1,440	1,320	120
Total		144,000	17,280	15,841	1,439

 

Even though there is a statutory rate of 12% for contribution to the fund, an employee can voluntarily pay higher contributions to the fund and this will be called “Voluntary Provident Fund” or VPF. Such VPF will be accounted for separately and interest on such VPF will also be tax-free. However, the employer does not have to match such a VPF contribution by the employee. But both the employee and the employer cannot opt for lower contribution in any case.

What is the Interest Rate on EPF? The rate of interest on EPF is 8.50% as on date of writing this article, whereas it was 8.65% for F.Y. 2018-19 and 8.55% for F.Y. 2017-18. The rate of Interest on EPF contribution keeps on changing as per the amendment in the Finance Act every year. The interest is calculated every year based on monthly running balance.

What is UAN? UAN is a Universal Account Number which is PAN based. It acts as a blanket for multiple member identification numbers allotted to a single employee by different employers. These Member Identification numbers are called as Provident Fund Account Numbers.

UAN will enable the employee to view details of all his PF Accounts. Even if a person switches his job, he needs to quote his/her UAN no. to his new employer to enable the new employer to start his new PF account. UAN is mandatory for all employees and it will help in managing the EPF account and even PF transfer and withdrawal will become much easier than before. Remember, in most cases, the employer provides the UAN and the employee just gets it activated by providing relevant KYC documents to the employer. So, if you are changing jobs and already have a UAN, you need not get a new UAN from the new employer. It is a one-time permanent number that will remain throughout one's career. When you join a new organization, the first thing you should do is ask your employer for Form No. 11- “Declaration Form” to furnish the existing UAN. If you do not have one, then just give your previous PF number along with the date of exit from your previous job.

Can one withdraw the amount, or can we take an advance against the fund? As per the Act, to claim the final settlement of PF, an employee must retire from the service only after attaining 55 years of age. The total EPF balance will include Employees Contribution plus Employers Contribution plus interest accrued thereon. Any person on attaining 54 years of age (nearing retirement) can withdraw up to 90% of accumulated EPF balance along with the interest accrued thereon.

With effect from December 2018, if an employee is unemployed for 30 days, he /she can withdraw 75% of the EPF Corpus and balance 25% can be withdrawn if he/she is unemployed for more than 60 straight days. To withdraw this money, one can use Form 19 – which is UAN based form and an employee in this case can bypass the employer’s signature. This facility is available to all those members whose UAN is activated and seeded with KYC details linked with a bank account as well as Aadhar card. This can be done online.

Contribution towards Employee’s Provident Fund (EPF) is meant to take care of employee’s post-retirement needs. But you need not wait till you retire to lay your hands on it. The Employees Provident Fund Organisation (EPFO) allows one to access their EPF even during employment. Such withdrawals are treated as “advances” and not loans.

Such advances are allowed only under specific situations like:

·        Buying or construction of a House/ Plot.

·        Repaying home loan.

·        Medical emergency needs. (Self or Family members)

·        Higher education. (Self & Children)

·        Marriage. (Self/ Children /Siblings)

This advance will not be treated as a loan and there is absolutely no need to repay the amount of advance and neither to pay any interest on the same.

With effect from 27^th March 2020 non-refundable advance can also be taken to meet financial emergencies related to Pandemic. (e.g. Coronavirus)

EPFO has allowed employees of the PF scheme to use 90 percent of EPF accumulations to make down payments to buy houses and use their account for paying EMIs of home loan. Under the new rule, an essential requirement for a PF member to withdraw one's PF money to buy a real estate property is that he/she must be a member of a registered housing society having at least 10 members. As a member, one can use the PF funds for an outright purchase, down payment for a home loan, for buying plots & for the construction of the house. The transaction can be made through the Central government, State government, and from a private builder, promoter, or developer. Only those members who have completed 3 years as a PF member will be eligible for this scheme.

What are the TAX implications on withdrawal of EPF? The EPF withdrawal is not taxable if an employee has completed at least five years of continuous service. If an employee has switched jobs in less than 5 years but transferred the EPF to the new employer, it will be counted as continuous service. For instance, a person works for 1.5 years and joins another organization, he transfers his PF balance to the new employer where he works consistently for 3.5 years. Taken together, it will be 5 continuous years of service for an employee. It is, therefore, important to transfer your existing PF account to your new employer.

There will be Tax implications in case the employee withdraws the PF balance without completing five continuous years of service. The total employer's contribution amount along with the interest earned will be taxable in the year of withdrawal. Also, the amount of deduction claimed under Section 80C on the employee’s own contribution will be added to employee’s income in the year of the withdrawal. In addition, the interest earned on one's own contribution will also be subject to tax.

The government had introduced Tax Deducted at Source (TDS) on PF withdrawals to discourage premature withdrawals and promote long-term savings. No tax is deducted if the employee withdraws PF after 5 years of continuous service. TDS will be applicable at the rate of 10 percent, provided the PAN card is submitted. If the withdrawal exceeds Rs. 50,000/- TDS will be applicable.

One must understand that the money in the EPF account is Government-backed. In fact, it enjoys the Exempt, Exempt, Exempt (EEE) status as contributions to EPF under Section 80C is exempt from tax. The interest earned is tax-free and the total corpus on maturity is exempt from tax. Subject to certain conditions as mentioned above. 

Dipesh Sethia