EPF stands for Employee Provident Fund. It is a retirement benefits scheme that is enjoyed by crores of employed people in India. To be specific, according to annual surveys done by the government, there are around 19.3 crore EPF accounts managed by the EPF Organisation. Let us understand EPF in a bit more detail.
Basic Introduction
EPF falls under the Employees Provident Fund & Miscellaneous Provisions Act, 1952 of the Indian Government. According to its regulations, an employee contributes a part of their monthly income to this fund. Similarly, the employer also does the same and the motive of this is to generate a particular amount of savings through all the monthly contributions so that the employee has a big corpus to fall back on, once they retire from work.
Who can avail of the benefits of EPF?
If you are a working Indian citizen, you technically can enjoy the pros of this fund. If your organization has more than twenty employees, then it must register itself with the EPF Organisation. According to the EPFO mandate, employees and employers need to contribute 12% of their basic monthly income towards this fund.
What is the basic calculation of EPF?
As we have already discussed, each employee and employer contribute 12% of monthly income towards EPF. But there is a catch in this calculation. The fact that the employer has to contribute 12% monthly is true, but this amount in its entirety does not go into the EPF. This 12% has a breakdown of 8.33% and 3.67%. While the 3.67% goes into the EPF, the remaining 8.33% goes directly into the EPS or the Employee’s Pension Scheme. All of these funds can be withdrawn by the employee after their retirement or before it, only under special circumstances. Under EPF, the employee can wish to contribute at a higher rate, but the employer has no such obligations.
What are the benefits of EPF?
- EPFs offer good interest rates which usually vary between 8-9%. The current rate of interest for this financial year, valid between April 2021 and March 2022 is fixed at 8.1% (Recently changed from 8.5%).
- The returns under EPF are completely tax-free and It comes under the EEE category.
- EPFs are low-risk instruments since they are backed by the government.
- The option of life insurance is there for EPF holders. In case of the death of an EPF holder, their nominees will get full relief.
There is another retirement scheme from the GOI known as the National Pension System. Read more about it here:
Example of EPF Calculation
The calculation of the contribution of salary into the EPF account can be understood in two steps.
First, the calculation stands very simple, if the income of the employee is at or under ₹ 15,000. (Let’s say it’s ₹ 15,000 per month).
Contribution of employee for EPF = 15,000 x 12% = ₹ 1800
Contribution of employer for EPF = 15,000 x 3.67% = ₹ 550.5
Contribution of employer for EPS = 15,000 x 8.33% = ₹ 1250 (Fixed bracket)
Now let us see what happens when the income of the employee is over ₹ 15,000. In this case, the amount exceeding ₹1250 for the EPS contribution by the employer, goes into the EPF account. Let us suppose the salary is fixed at ₹ 50,000. Then,
Contribution of employee for EPF = 50,000 x 12% = ₹ 6000
Contribution of employer for EPF = 50,000 x 3.67% = ₹ 1835
Contribution of employer for EPS = ₹ 1250.
8.33% of 50,000 is ₹ 4165. Since ₹ 1250 is a fixed bracket for the employer’s contribution to the EPS account, the remaining 4165-1250= ₹ 2915 is transferred to the EPF account.
So, total balance in EPF account will be 6000+1835+2915 = ₹ 10,750.
Conclusion
The EPF scheme is a beneficial retirement plan that might come in handy when you require finances during your post-retirement phase in life. Using EPF, plan according to your needs and enjoy long-run financial benefits.
