What is EPF

If you are a salaried employee or about to begin your professional life soon, Employee Provident Fund (EPF) deserves your utmost attention. It is a smart way to build your retirement corpus, avail of tax deduction on the invested amount and generate tax-exempt income.

Employee Provident Fund: What is it?

• The EPF scheme was introduced under the Employees' Provident Fund and Miscellaneous Act of 1952. It is a savings scheme that allows salaried employees to save a certain part of their monthly income. Just like the employee, the employer also contributes to the PF Account of the employees.
• The employee and the employers contribute 12% of the monthly income + Dearness Allowance (if any) in the EPF Account each month. While the employee contribution of 12% is put into the EPF Account, only 3.67% of the 12% contribution of the employer goes into EPF. The remaining 8.33% of the employer is put into Employees’ Pension Scheme (EPS).
• Also, employees do have the option to increase their EPF contribution voluntarily. This additional contribution above the 12% limit is added to their Voluntary Provident Fund (VPF). The VPF too earns interest just like EPF. However, in the case of VPF, the employer is not required to match the higher contribution of the employee.

Interest rate of EPF

• One of the most significant EPF benefits is that the contribution earns interest every year. All the funds collected by the employees and the employers are then invested by the Employees’ Provident Fund Organisation (EPFO). This investment then earns compound interest for the employees. The EPFO and the Government fix this interest rate and adjust it every year. The current EPF interest rate is 8.75% per annum.
• While EPF contribution is made monthly, interest calculation is done yearly. The interest earned by an EPF Account is credited into the account on Apr 01 every year. The contributions done only to the EPF Account will earn interest. EPS contribution does not earn this interest.

Tax benefits of EPF

• The contribution that an employer makes into an EPF Account of an employee is tax-free. The contribution made by the employee is tax-deductible under Section 80C of the Income Tax (IT) Act up to the permissible limits.
• Moreover, the total amount invested in the EPF scheme, along with interest earned throughout the investment tenure, is tax-exempt at the time of withdrawal.

EPF withdrawal

• The final settlement of EPF Account can only be done when an employee retires after the age of 55 years. However, people close to their retirement age, let’s say 54 years, are eligible to withdraw up to 90% of the EPF corpus. There are a few other scenarios that allow an employee to withdraw their EPF amount before attaining 55 years.

Some instances are as follows:

• Unemployment for 2 months or more
• Switching from salaried employee to a self-employed professional
• Salaried employees who have found jobs in foreign countries
• Salaried employees wanting to settle abroad
• Female employees leaving employment due to marriage

You can also partially withdraw your EPF balance in these conditions:

• Education or marriage expenses of yourself, children or siblings
• Home Loan repayment (only after 10 years of EPF contribution)
• Emergency medical expense
• Home repair or alterations
• 50% of EPF contributions can be withdrawn up to 3 times within the working life (only after 7 years of EPF contribution).

Planning your retirement with EPF

• While most people want to save and invest for the future, the current life and its related expenses often make future planning very challenging. EPF proves very beneficial in such cases.
• A certain portion of your monthly income is automatically saved and invested with EPF. As the contribution is already deducted before crediting the salary to an employee, EPF helps in eliminating the postponement of retirement planning. It enables you to invest in your retirement right from when you start working, taking you closer to your dream retirement.

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