Employee Provident Fund (EPF) is a tax-saving plan in India that helps salaried individuals save for their retirement through employer contributions. It provides a retirement benefit to salaried workers, ensuring their daily expenses are covered and keeping their lifestyle intact even after retirement.
What is an Employee Provident Fund?
The Employee Provident Fund (EPF) is a savings scheme in India, managed by the Central Board of Trustees and assisted by the Employees' Provident Fund Organization (EPFO). It aims to promote savings for employee's post-retirement in the country. Employers and employees contribute 12% of their basic wage monthly to the fund, which is then given to the retiree in a lump sum with interest. The return on investment is calculated by EPFO, and the claim is tax-free. The Indian Government oversees this program, which makes it a low-risk investment.
Meaning of PF Account Number
Every company that is registered with the EPFO will give its employees a Provident Fund (PF) account number. A code of numbers generates the PF number. It indicates the location, state, regional office, and member code of the PF. The PF number is administered by the PF trust. A unique number is given to PF members, which is called a Universal Account Number (UAN). A person's PF account number of changes when they shift their jobs. But the UAN number stays the same.
Eligibility Criteria for the EPF Account
The following are the requirements to be eligible for the EPF scheme: The employee must be an active member of the scheme. The employee can avail himself of insurance, Provident Fund, and pension benefits from joining the organization. An organization with at least 20 employees is eligible to receive EPF benefits. Employees who make less than Rs. 15,000 a month must register under EPF. Workers who make over INR 15,000 a month can open an EPF account but must get the Assistant PF Commissioner's permission beforehand.
Contribution towards EPF
When your salary is sent out, the employer will deduct your EPF contribution, which is currently set at 12% of your basic income. Everyone with a base income of up to Rs.15,000 must enroll in the Employees Provident Fund. Those who are above this criterion have the option to participate voluntarily. Once you have agreed to participate, however, you cannot withdraw that consent from the same employer. If the employee's basic pay is greater than Rs. 15,000, the employer can limit the deduction to 12% of Rs. 15,000 rather than deducting it from the total amount of the employee's basic pay. In addition, the employer will contribute an amount equivalent to the employee's contribution.
Along with other eligible expenses such as the payment of life insurance premiums, the repayment of home loans, the purchase of National Saving Certificates, ELSS, and tuition fees for children, you have the right to claim the amount of PF deduction under Section 80C up to Rs 1.50 lakh each year. This entitlement applies to the EPF contribution that is deducted by your employer. An employee can contribute more than what is required as a minimum, but the deduction they are eligible for will be limited to Rs. 1.50 lakh according to Section 80C.
The amount an employer contributes to an employee's EPF account can be deducted as a permissible business expenditure. To the extent that the contribution made by the employer does not exceed 12% of the employee's basic salary, the employee is not required to pay taxes on that portion of their compensation; however, if the contribution is greater than that threshold, the employee will be required to pay taxes on that portion. In the same way, if the total amount of contributions paid by an employer to an employee's EPF, Superannuation, or NPS account, taken combined, is greater than Rs. 7.50 lakh, then the excess amount is considered taxable income for the employee.
Interest accrued on the balance in EPF
As long as an individual is employed, the interest credited to their Provident Fund account is tax-free. The amount of interest credited to the employee's EPF account, however, becomes taxable after retirement and must be declared as "Income from other sources" on the tax return. The current rate for EPF deposits is 8.15%, and the same rate applies to VPF deposits. Every year, the interest rate on the EPF is reviewed.
Gains from the EPF
EPF has a wide range of advantages. Some of the benefits are as follows:
Fixed returns: The Employees' Provident Fund (EPF) is a program that is supported by the Government and provides you with a rate of return that is guaranteed. Every year, the Government is responsible for reevaluating and announcing the interest rates that will be applied to EPF contributions. Your profits are secure and insured, so you do not need to worry about any market fluctuations.
Tax reductions: Tax breaks are available under Section 80C of the Income Tax Act for individuals who invest in the EPF system. You are eligible for a tax deduction of up to Rs. 1.5 lakh for contributions to the EPF.
Retirement provisions: Building up funds for your retirement is the primary objective of EPF. When you reach retirement age or 58 years old, you can withdraw your entire corpus, which you can then put to fund your retirement. You can also apply for a monthly pension by using Form 10D.
Fund for Emergency: In case of an emergency, you can access your EPF funds and submit a request to withdraw a portion of the fund. In accordance with the partial withdrawal rule, you are permitted to withdraw up to 90% of your corpus.
Pension Scheme: The employer makes the required contributions to the employee's pension plan and the employee's personal retirement account (PF), which the employee can use when they have retired.
Easily Accessible: When you obtain the Universal Account Number (UAN), your employees can easily access their pension fund account through the EPF member portal. They can transfer their accounts whenever they choose to change their existing jobs.
Insurance Scheme: This act includes rules that require an organization's employer to contribute to the life insurance of an employee. Still, it does not include provisions for a group insurance policy. The plan guarantees that all the employees are adequately covered by insurance.
Tax on EPF Withdrawal: EPF withdrawals are tax-free unless the employer's contribution has not been made for at least five years. The exemption is based on the number of months EPF contributions have been made. If the EPF balance becomes taxable due to premature withdrawal, 10% of the total balance will be deducted. If the employer does not provide a Permanent Account Number (PAN) or does not furnish the PAN, 30% as tax will be deducted. Tax deductions and tax liability are distinct, so higher slab rates may result in higher tax payments. If the tax liability on the total income is less than 10%, a refund of the tax deducted on the EPF withdrawal can be obtained. Employer contributions and interest will be taxable under "Salaries," while employee contributions and interest will be taxed under "Income from other Sources." If no deduction was claimed under Section 80C, only the interest on the contribution portion is taxed.
