Tuesday, March 26, 2013

Employee Provident Fund - Demystified

Employee Provident Fund or EPF is by far the most common Retirement Planning option for the salaried class of India and in some cases the only Retirement Option. Even though most of the Salaried employees of India or should I use the more popular term "The Middle Class" have an EPF account and contribute towards it monthly, not many of us know what it is and how it operates. This article is one among the many that are coming up in this blog that can help you learn about Employee Provident Fund or EPF.

Let’s get started, Shall We???

What is the Employee Provident Fund (EPF)?

The EPF is created by the Employees Provident Fund Organization (EPFO) of India, a statutory body of the Indian Government under the Labor and Employment Ministry. It states that an organization having 20 or more permanent employees on its payroll, should register with the EPFO.

A Provident Fund is a fund that is created, through contributions, to provide financial support to individuals in their future (Specifically for post-retirement). The Employee Provident Fund is just such a fund. Contributions are made on a monthly basis, by both employees and employers, thereby encouraging employees to save a portion of their salary each month. Investments made by millions of employees across India are pooled together and invested by a trust.

The EPF is a tax free investment instrument for the salaried class. Interest earned on it is tax free, and returns are also not taxed. You also get a deduction under Section 80C for contributions made towards your EPF.

Do You want to take a guess at the value of the total corpus of the funds accumulated by the EPFO???

It is more than Rs. 3 Trillion...

Where does your Monthly EPF Contribution Go?

Currently, the following three schemes are in operation under the EPF Act of 1952, and it is into these trusts that your monthly contributions go. These are as follows:

1. Employees Provident Fund Scheme (1952)
2. Employees Deposit Linked Insurance Scheme (1976)
3. Employees Pension Scheme (1995)

In a majority of the cases, EPF, EPS and EDLIS are calculated on the basis of your Basic + Dearness Allowance (DA). Others consider your Basic + Dearness Allowance + Cash value of food allowance and retaining allowances if any as well.

What is the Employees Pension Scheme (EPS)?

This part of your monthly contribution is targeted towards offering pension on disablement, widow’s pension and pension for nominees. It is financed by diverting 8.33% of your monthly contribution away from the EPF and towards the EPS instead. This is kept to a maximum of 8.33% of Rs. 6,500, or Rs. 541. The government also contributes the equivalent of 1.17% of your monthly contribution towards the EPS.

Most people don’t realize this upper limit and think that it is a fixed % of their Basic Salary whereas the government has set up an upper limit. So, if your Basic Salary is more than Rs. 6,500/- per month, only Rs. 541/- will go towards EPS.

The purpose of the EPS is to provide for the following:

1. Superannuation Pension: A member who retires after 20 years of service and at or after the age of 58 years
2. Retiring Pension: A member who has rendered eligible service of 20 years and then retires before attaining the age of 58 years
3. Short Service Pension: A member who has rendered more than 10 but less than 20 years of eligible service
4. Permanent Total Disablement Pension: A member who is permanently and totally disabled and is unable to work/earn

What is the Employees Deposit Linked Insurance Scheme (EDLIS)?


Under this scheme, employees receive Life Insurance cover. The cost of the scheme is borne by the employer, but the life insurance received under this scheme is limited to Rs. 1,30,000/- (Which I personally feel is very low)

Most employers opt out for the EDLI and choose to have a group life insurance cover for their employees. This works out better for the employees and does not increase any cost to the employer. Usually the coverage provided under this scheme is a simple multiple of the annual salary of the employee (based on his/her grade/designation) and hence will be much higher than the fixed Rs. 1.3 lakhs cover that EDLIS offers.

A Sample Calculation - Of How Your EPF is Split Up and Saved:

Every Month a portion of your Salary is deducted towards EPF - This will be referred to as "Employee Contribution". Your employer too contributes a certain amount every month towards EPF - This will be referred to as "Employer Contribution".

Employee Contribution: 12% of your Basic Salary + DA (Comes out of your Salary)

Employer Contribution: Another 12% of your Basic Salary + DA (Comes out of your Employers Pocket)

In most corporate companies these days, this Employer Contribution too is considered as part of your total CTC (Cost To Company) and hence can’t really be considered as coming out of your Employers Pocket

The Employee Contribution goes entirely towards the EPF Scheme.

The Employer Contribution gets split up as follows:

1. 3.67% into EPF
2. 8.33% into EPS
3. 1.1% EPF Administration Charges
4. 0.5% into EDLIS (If Applicable)
5. 0.01% EDLIS Administration Charges

If you remembered to add up the numbers the total comes up to 13.61% which is higher than the 12% Employer contribution that I just mentioned a few lines ago. That is because:

* The 1.1% EPF Admin Charges is borne by your Employer and is not part of your CTC
* The 0.5% contribution to EDLIS or 0.01% EDLIS Admin Charges too are borne by your Employer (If Applicable) and is not part of your CTC.

So, if you just sum up the 3.67% that goes into your EPF and the 8.33% that goes into your EPS - The Total comes up to 12% doesn’t it?

In cases where the Basic Salary of an employee is more than Rs. 6,500/- most employers limit the EPS contribution to Rs. 541/- and contribute the remaining towards EPF.

For ex: If your Basic Salary is Rs. 10,000/-
12% of your Basic Salary works out to Rs. 1,200/-
3.67% of your Basic Salary works out to Rs. 367/-
8.33% of your Basic Salary comes to Rs. 833/- which is higher than the limit of Rs. 541/-

So, your Employer will contribute Rs. 541/- towards EPS and contribute Rs. 659/- towards EPF (Rs. 367/- + Rs. 292/-)

In Essence, the employer will contribute 12% of your Basic just as mentioned above with the simple difference being the fact that the EPS component is constrained by an upper limit and the remaining usually goes towards your EPF.

What Happens to the Money that is accumulated in the EPF Corpus?

The EPFO usually lends loans (To Government Entities) or uses the money to finance Government Projects. As a Result, the Government offers a fixed Rate of Interest on the money accumulated in our EPF Corpus. So, not only does your corpus grow every month (with additional monthly contributions) but also earns a fixed and regular interest.

When is the Interest Calculated/Credited in our EPF Account?

The Interest is usually Calculated as well as Credited into your EPF Account at the end of each Financial Year. Compound interest is paid on the amount standing to the credit of an employee as on 1st April of each year.

One Last Word of Caution:

There is a clause in the PF guidelines that allows employees to choose Rs. 6,500/- as the upper salary limit (Just like EPS) to calculate the EPF contributions as well. So, companies that offer PF as a benefit over and above the salary package to the employee may opt to put this upper limit of Salary on PF calculations thereby reducing your PF contribution every month. Firms that offer EPF as a total benefit in the "cost-to-company or CTC" mode wont bother about this because even their share of PF is considered part of your salary and hence they wont mind paying the higher PF amount

Hope this article covered all the basics you needed to know about the Employee Provident Fund Scheme. Watch out for more articles on EPF!!!

29 comments:

  1. Hello sir,
    I work in an IT organisation having strength more than 50. No PF gets deducted from my salary as of now . Can any organisation with this number of employee NOT register for EPF ? I was not told anything about PF from the date of my joining but I am interested in PF .can I do anything regarding it ?

    ReplyDelete
    Replies
    1. Any company that has more than 20 full-time Permanent employees on its payroll must have EPF. If that is the case you can reach out to your HR Department and ask them why there is no PF contribution even though the company has so many permanent employees. They are the ones who can help create/open a PF account on your behalf.

      Delete
  2. Hi Sir

    In our company more than 15 people are working but from company they not deducting any pf amount

    we need pf benif .. also we Asked in our company but they refused to pf so kindly give a suggesion and give whom to complaint ?? ?kindly give a suggestion

    ReplyDelete
    Replies
    1. You need to take this up with your company and if they refuse you can reach out to the regional pf office. Note - if your company does not have more than 20 number of permanent employees - they do not have to give pf benefits to their staff. I dont think 15 is sufficient to complain to anybody

      Delete
  3. Hello sir,
    I have worked for 2 year 2 months in an organisation. Now i am withdrawing my pf into my account. When i tried to check my balance they sent me a message -
    EE amount = 15730
    and ER amt 4801
    but according to my calculation after deduction of 780 from my side and same from employer side for 2.2 years, it should be around 35000 to 40000.
    Please let me know if i am calculating wrong.
    Thanks.

    ReplyDelete
    Replies
    1. Hi - The 780 from your employers side does not get completed contributed as PF. As I explained in this article it goes in EPS and a lot of other schemes. Anyways, was the amount that got deducted for all the 26 months 780+780?

      Delete
  4. Dear Sir,
    I have worked in a company for 4 years and have contributed towards EPF. I have resigned from the job and not working for more than 1 year. Now, I would likle to withdraw the PF corpus from my account. While I am aware that this will be subject to income tax since the withdrawal is done without completing 5 years of service, I would like to know if Tax will be deducted by EPFO (i.e. TDS) or I will have to pay the tax after EPFO setttles the amount without deducting any tax. Thanks for your response.

    ReplyDelete
    Replies
    1. Anonymous - As far as I know, EPFO does not deduct TDS and you would have to pay taxes on the same, after you receive it.

      Note: The government is strongly pushing for TDS and EPFO being a government entity might take up TDS per directives from the government. It would depend on when you submit the withdrawal request.

      Delete
  5. meri company wale mujhe pf form sign karke nahi de rahe hai, mujhe kya karna chahiye, maine apna notice period bhi pura kiya hai

    ReplyDelete
    Replies
    1. Sorry, I dont understand. What is your question?

      Delete
    2. Hi every month they dedcut pf from my salary but when I check my pf balance it is two low
      Monthly deduction 780
      Worked fr 13months but when I check of balance it is lyk 1566 EE amount & 480 ER amount
      I'm depressed n I hate of now
      Tot my money vl at leat get increase by single percent but it is just horrible

      Delete
    3. Ask for a detailed statement and find out where the money went. Total amount is like 2000 rupees but you are saying you worked 13 months. So, am sure either the balance you checked is wrong or the number you think is getting contributed is wrong.

      Delete
  6. My company not signing my pf form. What I do?

    ReplyDelete
    Replies
    1. Anonymous - Do we have any reason - why? Talk to them and find out why. Then try to negotiate with them and try to convince them to sign the forms.

      Note: If the company is willfully refusing to sign you can legally consult a lawyer and take action.

      Delete
    2. HR executive asks our owner's not here. I fill & submit the form on May 3rd 2014.

      Delete
  7. Hi Anand,

    I resigned from Company A on 5 September, 2014 and will be joining Company B on 22 October, 2014 as a contractor for 3 months. As per my understanding, I can submit the PF withdrawal form only after 2 months from the date of resignation.

    Can I submit the PF withdrawal form while I am a contractor in Company B? I read somewhere that I can withdraw after 2 months only if I am unemployed.

    Regards,
    Jimmy
    f

    ReplyDelete
    Replies
    1. Do you have PF in your current job? If YES, you cannot withdraw now. If you dont have PF, then Yes, you can withdraw

      Delete
  8. Hi, I read somewhere it is illegal to have multiple PF accounts. But there are people who might have inactive PF accounts which are a few years old and who change jobs frequently, might not have transferred to the other company. Can they claim their PF?

    ReplyDelete
    Replies
    1. Yes, it is illegal to have multiple PF Accounts. When you swich jobs you are supposed to transfer your pf. You are not legally supposed to withdraw your pf while job switch. So, as long as you are employed, you should not withdraw your pf.

      Delete
  9. Hi all,
    i have apply EPF Transfer through online, my present company approved but my previous company not approved, why because i have resign the company but i am not completed notice period of 3 months. please help me how to with draw / transfer my EPF

    ReplyDelete
    Replies
    1. You need to come to a consensus with your old employer because from your side you did not meet your legal commitment of a proper notice. Without compromise, sadly there is not much you can do.

      You can of course take the legal roue when an old employer fails to cooperate but in that case it will hurt you more because you dint serve your notice.

      Delete
  10. @anand: Iworked in an IT company from 2005 to 2009 and then I resigned. I did not transfer my PF account to new company. Now i want to withdraw the amount from old company. Would that be possible. Would the interest be accrued all through these years, meaning the pf for 2005 would have interest accrued for 10 years and so on

    ReplyDelete
    Replies
    1. Hi - Are you currently employed? If so, you cannot/should not withdraw your old PF because withdrawal is not allowed when you are still employed, even if you are trying to get money from an old pf account.

      An account stops earning interest after 3 consecutive months where PF contributions are missed. From 2005 to 2009 when you were working the account would have earned interest but after 2009, the account would be dormant and would not have earned interest

      Delete
  11. MY EMPLOYEECONTRIBUTION IS 5056 , EMPL0YER CONTRIBUTION IS 1549 AND PENSIONN CONTRIBUTION IS 3499. HOW MUCH PF WILL I GET ?
    PLEASE TELL ME.

    ReplyDelete
    Replies
    1. You will get Employee Contrib + Employer Contrib.

      You will not get your EPS directly as cash based on contribution. EPS is paid out based on number of years of service

      Delete
  12. Hi Anand

    I retired from an IT company last year after working for 30 plus years. I worked in India till mid 90s, and then I was transferred to the US subsidiary. I retired in the US from the subsidiary. My PF that company maintained was with them till Oct 2015 year. I was sent statements til 2008. FYI - my contributions to this PF in India were stopped in mid 90s when my Indian Salary stopped and US salary started. Now, I live in the US and my status is that I am Overseas Citizen of India/ NRI.

    Now when I got my PF back it seems they paid interest to me till 2010 or 2011 (as per my calculations), and stopped paying interest after that. I asked them for calculation but they have not provided any calculation for the final amount. I think I lost Rs. 4-5 lakhs in interest. What do you think is the reason? Did some rules change in 2010 or 2011?

    I feel that in a company maintained PF if all the money in PF Corpus was invested together, how can they not give me interest when all employees in India are getting it yearly.

    I will greatly appreciate your views and inputs on this.

    ReplyDelete
    Replies
    1. When your monthly PF Contributions stop, the account automatically stops earning interest and only the principal is preserved. Ideally when you were transferred permanently to your company's overseas branch, they should've given your PF Also.

      Anyways, as far as I know, you cannot get any interest if the account was maintained with the government PF funds. If your company maintained the funds then you may be able to negotiate. Check with them.

      Delete
  13. Hi Anand,

    I have worked for a company A and have resigned. Now i work for a company B. I applied for PF transfer from company A to B and it has been approved by company A. The status in member portal it display that claim has been settled and transferred. But the passbook in the portal still shows from company A and not company B. Where can i see this settled amount and is there a way that can i withdraw my PF from company A even the transfer claim has been approved?

    ReplyDelete
    Replies
    1. Firstly, you cannot withdraw your PF of company A while working in company B and secondly since your request to transfer is already processed, there is no way you can get the cash.

      unfortunately our PF systems are not super updated all the time. You can ask company B for a PF Acc statement and check the amounts.

      Delete

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