A wise person had once said, “it is never too early to start planning for retirement”. While there are multiple retirement plans available in India, one scheme that has the maximum recall value for salaried individuals is the Employee Provident Fund (EPF) scheme.
What is the Employee Provident Fund (EPF) scheme?
Launched in the year 1952, the EPF scheme seeks to provide employees with a way to plan for their retirement. This social security scheme enables employees to save a certain portion of their monthly income in a fund dedicated to financial planning for important life events such as retirement, child’s marriage or education, etc. The USP of this scheme is that there are two sets of contributors – the employee as well as the employer. All companies or establishments which employ 20 or more people need to contribute to this scheme. Currently, there are more than 6 crores active PF subscribers in the country.
Here are some of the benefits associated with the Employee Provident Fund (EPF) scheme in India:
- It Helps to build a sizeable corpus by the time you reach your retirement stage
- It is an affordable financial planning tool as you do not need to invest a large lump-sum.
- The scheme offers a host of tax concessions and benefits
- It acts as a financial back-up during emergencies
Contribution
Employees need to contribute 12% of their salary towards PF contribution every month. The employer makes a matching contribution. The employer’s contribution is split in the following manner:
- 3.67% towards the Employee Provident Fund (EPF) Scheme
- 8.33% towards Employee Pension Scheme (EPS)
(Salary for the purpose of EPF includes basic salary and dearness allowance. Employer’s contribution is 10% for jute, brick, beedi and guar gum industries or companies which have been declared as sick.)
Employees are allowed to contribute an additional amount (in excess of 12% but limited to 100% of their salary) towards the EPF scheme and earn interest on the same. However, employers are not required to make an additional contribution at par with the employee’s voluntary contribution.
Rate of Interest
The EPF interest rates are notified by the Government on a yearly basis. The rates are decided after taking into consideration a host of factors such as economic growth. For FY20, the EPFO has lowered the interest rates to 8.5% per annum (from 8.65% in the previous year). Here is a look at the EPF interest rates in the past.
Impact of tax on EPF deposits
EPF deposits are exempt from tax at all three stages – deposit, interest accrual and maturity. Additionally, investments made in Employee Provident Fund (EPF) scheme qualify for deduction as per Section 80C. However, the tax exemption benefits are not available if the withdrawals are done before the completion of five years.
Transfer of EPF
EPF offers funds transfer facility when you change your employer. In this process, the UAN (Universal Account Number) plays a critical role. This 12-digit number is like a social security number and remains constant throughout an individual’s life, irrespective of the organization he or she is working with. UAN allows employees a single unified platform through which they can transfer their funds between companies, download PF statement as well as make withdrawals.
Knowing your EPF Balance
EPFO has leveraged technology to make employees’ lives easier. They can check their EPF balance through multiple ways:
- Through the EPFO website
- On the Umang App launched by Government
- By sending an SMS
- Giving one missed call
Withdrawal of EPF
While EPF is broadly seen as retirement plans, it can also be used to finance other important life events such as marriage, education, house purchase or medical expenses. Partial withdrawals (referred to as non-refundable loans) are permitted after the completion of five years.
Summing it up
Employee Provident Fund (EPF) scheme is one type of retirement plan in India that is in-built in the system. Being a risk-free investment avenue that can help you amass a considerable corpus to meet your financial needs post-retirement, it is a win-win deal for all salaried individuals.
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