All You Need To Know About Employee Provident Fund

Posted by Bhavna Singhal on January 14th, 2019

What is EPF?

EPF or Employees’ Provident Fund is a scheme managed by the government that promotes savings for professionals employed in the service sector. Under this scheme, both the employee and the employer has to pay a certain amount of contributions every month towards the EPF scheme. As an employee, you will get this invested amount in the scheme during the time of your retirement. Besides employee, employers also make an equal contribution in the scheme to earn an attractive rate of interest over time. Most of the employees have a lot of confusion regarding the EPF Scheme, their contribution, interest earned and withdrawal options available under the scheme. In this article, you will get to know about some of the basics of the EPF scheme.

Provident Fund Deduction from Salary:

The time you start working in the corporate sector, you and your employer both contribute 12% of your basic salary plus dearness allowance, if any directly into your EPF account. The 12% of your basic salary contribution goes into your EPF account along with 3.67% from your employer, while the balance 8.33% from your employer’s end is transferred to your EPS (Employee’s Pension Scheme) account. It is very important to note that if your basic salary is above Rs. 6,500 p.m., then your employer can contribute only 8.33% of Rs. 6,500 (i.e. Rs. 541) to your EPS and the balance goes directly into your EPF account.

EPF Interest Rate:

The interest rate offered by EPFO to employees is currently 8.65%. The interest is calculated on the basis of monthly balance lying in the employees’ account. The subscribed member under EPF scheme makes the contribution to the EPF scheme on a monthly basis but the interest on your EPF is calculated on a yearly basis. It is important to note that interest will only accumulate on your EPF balance and not on the funds in your EPS balance.

Tax Benefits on EPF:

The employer contribution to your EPF account is tax-free, while your contribution is tax-deductible under Section 80C of the Income Tax Act. The money you invested in EPF, the interest earned and the money you withdraw after 5 years are exempt from any tax deductions on your EPF account under Income Tax.

Withdrawal Policy:

The subscribed member under EPF scheme is allowed to withdraw the invested amount in the scheme after some time. You can withdraw an amount from your EPF account in the case if you have not been working for more than two months. In February, the EPF body has changed the rules to allow withdrawal of only the employee’s contribution, not the employer’s.

Also Read: Financial Emergency: Withdraw your EPF or Take a Personal Loan

Understanding EPF calculation:

Let’s have a look at this below-given example to get a better understanding of how EPF is calculated-

Suppose your basic pay is Rs. 25, 000 per month which increases at a rate of 10% every year. Interest on EPF is calculated on a yearly basis on your contribution of 12% along with employers’ contribution of 8.33% (EPS) and 3.67% (EPF). Assuming a rate of interest offered by the government to be 8.5%.

It is very important to know about all the basics of EPF before you actually start working in the service sector. Knowing that will help you better understand all about EPF Scheme and how it is levied on your basic pay.

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