Employees’ Provident Fund (EPF) is a retirement benefit scheme and investment option for salaried employees. The scheme is managed by the government as a social security scheme and the rate of return of this scheme is higher than most of the small savings instruments.
It is mandatory for the salaried employees working in organizations registered under the Employees’ Provident fund Organization (EPFO) to contribute to EPF. An employee contributes 12% of the basic salary + DA. The employer also contributes an equal amount. Employers’ contribution is not added as income of the employee. At the same time it is an expense for the employer. An employee can make additional contribution up to a maximum of 100% of basic salary + DA. However, this amount goes to Voluntary Provident Fund (VPF) which is an extension of EPF and is governed by the same rules.
2. Safety of Investment
The returns of the EPF are guaranteed by the Government of India. So, there is complete safety of one’s investment.
The mandatory contribution towards EPF is exempted from tax at all the 3 levels, also know as 3 levels, i.e. E-E-E (Exempt-Exempt-Exempt).
1st Exempt – On Contribution up to Rs 1.50 lakh under Section 80C and 80 CCD of the Income Tax Act.
2nd Exempt – Interest earned.
3rd Exempt – At the time of withdrawal.
The E-E-E regime is only applicable after 5 years. Any amount withdrawn before the completion of 5 years is treated as income and is taxed as per the individual’s tax slab.
4. Withdrawal of EPF
Complete withdrawal of funds is allowed when:
# An employee has attained the age of retirement as per the organization rule.
# An employee is unemployed for continuous period of 60 days.
Partial Withdrawal: EPF rules discourage early withdrawals as the scheme is perceived as a long-term saving instrument. However, the rules permit partial withdrawal to meet certain life goals like home loan repayment, house purchase, construction or renovation/alteration; marriage of children and medical treatment etc.
5. Ease of Operation
# Unique Account Number (UAN): On opening an EPF account, the employee is given an UAN number. It is a unique number and it’s used for all the services of EPFO.
# Tracking – All account activities can be tracked and monitored online on the website i.e. http://www.epfindia.gov.in with the help of UAN.
# Change of Organization – At the time of changing an organization, the employee has to just provide the UAN number to the new employer. Through this, the EPF funds will be transferred to the new employer and the contribution would continue.
# Nomination – Nominee registration can be done at the time of starting the EPF contribution. The amount will be transferred to the nominee in case of death of the subscriber. If the nominee is not registered, the amount will be transferred to the immediate family member or the legal heir. The claim can be only forwarded through the employer.
(By Pradeep Agarwal, CEO, Meri Punji IMF Pvt Ltd)