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What is EPF scheme and how to calculate PF balance?

The total EPF balance at any point of time includes the employee's contribution and that of the employer, along with the accrued interest.

, ET Online|
Last Updated: Jan 27, 2020, 09.36 AM IST
As an employee working in a corporate set-up, there are several things one would like to know about the Employees Provident Fund (EPF). EPF is the main scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 . The scheme is managed under the aegis of Employees' Provident Fund Organisation (EPFO).

It covers every establishment in which 20 or more persons are employed and certain organisations are covered, subject to certain conditions and exemptions even if they employ less than 20 persons each.

Under EPF scheme, an employee has to pay a certain contribution towards the scheme and an equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer’s contribution with interest on both, on retirement.

As per the rules, in EPF, employee whose ‘pay’ is more than Rs. 15,000 per month at the time of joining, is not eligible and is called non-eligible employee. Employees drawing less than Rs 15000 per month have to mandatorily become members of the EPF. However, an employee who is drawing ‘pay’ above prescribed limit (at present Rs 15,000) can become a member with permission of Assistant PF Commissioner, if he and his employer agree.

1. Contribution by employer and employee
The contribution paid by the employer is 12% of basic wages plus dearness allowance plus retaining allowance. An equal contribution is payable by the employee also. In the case of establishments which employ less than 20 employees or meet certain other conditions, as per the EPFO rules, the contribution rate for both employee and the employer is limited to 10 percent.

For most employees of the private sector, it’s the basic salary on which the contribution is calculated. For example, if the monthly basic salary is Rs 30,000, the employee contribution towards his or her EPF would be Rs 3,600 a month ( 12 percent of basic pay) while the equal amount is contributed by the employer each month.

It should, however, be noted that not all of the employer’s share moves into the EPF kitty. Out of employer’s contribution, 8.33% will be diverted to Employees’ Pension Scheme, but it is calculated on Rs 15,000. So, for every employee with basic pay equal to Rs 15,000 or more, the diversion is Rs 1,250 each month into EPS. If the basic pay is less than Rs 15000 then 8.33% of that full amount will go into EPS. The balance will be retained in the EPF scheme. On retirement, the employee will get his full share plus the balance of Employer’s share retained to his credit in EPF account.

2. Higher voluntary contribution by employee or Voluntary Provident Fund
The employee can voluntarily pay higher contribution above the statutory rate of 12 percent of basic pay. This is called contribution towards Voluntary Provident Fund (VPF) which is accounted for separately. This VPF also earns tax-free interest. However, the employer does not have to match such voluntary contribution.

Click here to go to EPF calculator

3. Withdrawals from the EPF account
According to the EPF Act, for claiming final PF settlement, one has to retire from service after attaining 55 years of age. The total EPF balance includes the employee’s contribution and that of the employer, along with the accrued interest.

There is, however, a window to partially withdraw the amount for those nearing retirement. Anyone over 54 can withdraw up to 90 percent of the accumulated balance with interest. But what if someone decides to quit his job before reaching 55? Under the existing rule, the employees, in such cases, can withdraw the full PF balance if he is out of employment for 60 straight days or more.

There was a proposal which restricted employee access to a part of the funds, allowing for the withdrawal of the employer contribution only after attaining the age of 58 years, which stands in abeyance as of now.

To withdraw money, one may now use ‘UAN based Form 19’ and in effect bypass the employer signature requirement. This facility will be available to all those subscribers whose UAN is activated and seeded with the KYC details like bank account and Aadhaar number. Currently, the form has to be submitted offline, but the EPFO is expected to extend this facility online too.

4. Interest on account
The Interest in EPF is calculated on the basis of monthly running balance.

Also Read: How to calculate Employees Provident Fund balance and interest

5. Universal Account Number
UAN stands for Universal Account Number to be allotted by EPFO. The UAN will act as an umbrella for the multiple Member IDs allotted to an individual by different establishments. The idea is to link multiple Member Identification Numbers (Member Id) allotted to a single member under single Universal Account Number.

UAN will help the member to view details of all the Member Identification Numbers (Member Id) linked to it. If a member is already allotted (UAN then he/she is required to provide the same on joining new establishment to enable the employer to in-turn mark the new allotted Member Identification Number (Member Id) to the already allotted Universal Identification Number (UAN).

UAN has been made mandatory for all employees and will help in managing the EPF account and even PF transfer and withdrawals will become much easier than before. Remember, in most cases, the employer provides the UAN and the employee just has to get it activated by providing relevant KYC documents to the employer. So if you are changing jobs and already have a UAN, you need not get a new UAN from your new employer. It is a one-time permanent number which will remain the same throughout one’s career.

When you join a new organisation, the first thing you should do is ask your employer for the ‘New Form No. 11- Declaration Form’ to furnish the existing UAN. If you don’t have one, then just give your previous PF number along with the date of exit from your previous job.

Also Read: Five steps to activate Universal Account Number

UAN is a must for smooth transfer of Provident Fund

EPFO to receive your PF contributions only if UAN is linked to current employer

6. The importance of five years of continuous service
Typically, in early and mid-years of their careers, employees tend to switch jobs. After leaving, they have two options with regard to their EPF. Either they can withdraw it after waiting for 60 days (if unemployed) or transfer the balance to the new employer.

The EPF withdrawal is not taxable if one has completed at least five years of continuous service. If one has switched jobs in less than five years but transferred the EPF to the new employer, it will be counted as continuous service. Someone, for instance, works for 1.5 years and then joins another organisation. He transfers his PF balance on to the new employer where he continues to work for 3.5 years. Taken together, it will be five continuous years of service for the employee. It is, therefore, better to transfer your existing PF to your new employer.

7. Tax on early withdrawals
Withdrawing the PF balance without completing five continuous years of service has tax implications. The total employer’s contribution amount along with the interest earned will get taxable in the year of withdrawal. Also, the amount of deduction claimed under Section 80C on one’s own contribution will be added to one’s income in the year of withdrawal. In addition, the interest earned on one’s own contribution will also be subject to tax.

The government had introduced Tax Deducted at Source (TDS) on PF withdrawals in order to discourage premature withdrawals and promote long-term savings. No tax is deducted if the employee withdraws PF after five years. Also, TDS shall not be applicable in case of PF transfer from one account to another. From June 1, 2016, for TDS, the threshold limit of PF withdrawal has been raised from Rs 30,000 to Rs 50,000. TDS will be applicable at the rate of 10 per cent provided PAN card is submitted.

8. Employees' Provident Fund Advances
Contributions towards Employees' Provident Fund (EPF) are meant to take care of one’s post-retirement needs. But you don’t have to wait till you retire to lay your hands on it. The EPFO allows one to access one’s EPF even during the course of employment. Such withdrawals are treated as ‘advances’ and not loans.

Such advances are allowed only under specific situations – buying a house, repaying a home loan, medical needs, education or marriage of children, etc. Also, the amount that you can take as an advance will depend on the specific situation, the number of years of service, etc. As it’s not a loan, one need not pay any interest on such advances. Unlike a loan, it is not necessary to repay the advance.

9. Availing advances
If you have your Know Your Customer (KYC) compliant Universal Account Number (UAN), which is activated and seeded to your bank account, you don’t have to even go through your employer to get hold of your EPF. The UAN Based Form 31 (New) can be directly submitted to the EPFO. Else, you may fill in Form 31 and submit it to the EPFO through your employer.

The employee can take the advance for buying or building a house or buying a plot of land and even for construction of a house on a plot owned by the member. The advance can also be taken for repayment of the outstanding home loan, for self or family member’s medical treatment, for the marriage of self/daughter/son/ brother/sister or for post matriculation education of son/daughter.

Also Read: How and when one can access EPF while still in job

10. Special advance scheme for housing
EPFO has recently allowed members i.e. the contributory employees of the provident fund (PF) scheme to use 90 percent of EPF accumulations to make down payments to buy houses and use their accounts for paying EMIs of home loans.

Under the new rules, an essential requirement for a PF member to withdraw one’s PF money to buy a real estate property is that he or she has to be a member of a registered housing society having at least 10 members.

As a member, one can use the PF funds for an outright purchase, as a down payment for a home loan, for buying plots, for the construction of a house. The transactions can be made through central government, state government and even from a private builder, promoters or developers. Only those members who have completed 3 years as a PF member will be eligible for this scheme.

Also Read: Here is the step-by-step process to withdraw 90% of your PF to buy home

Currently (2017-18), the EPF interest rate stands at 8.55 percent. In terms of returns from a debt instrument, EPF certainly stands tall. The money is sovereign-backed and the interest earned is tax-free. In fact, it enjoys the Exempt, Exempt, Exempt (EEE) status as contributions are deductible from income. There is hardly any debt product that gives such high return with safety and assurance. Therefore, it’s better to transfer your PF account when you switch jobs and avoid the temptation to withdraw the amount.

  1. What is EPF scheme?
    EPF is a retirement benefit plan where both employer and employee contribute a certain percentage of the salary.
  2. Who is eligible to join EPF scheme?
    According to the EPF scheme rules, it is mandatory for an employee to join the EPF scheme if his pay is less than or equal to Rs 15,000 a month. However, an employee whose salary is more than Rs 15,000 per month, then such an employee can join the EPF scheme if he and his employer agree with the permission of Assistant PF commissioner.
  3. Does my employer also contribute to my EPF account?
    Yes. According to the current EPF rules, an employer also has to contribute to his/her employee's account. An employer has to contribute 12 percent of salary of an employee. (Salary here is basic plus dearness allowance and retaining allowance.)
  4. Can I contribute higher amount to my EPF account?
    Yes, you can contribute higher to your EPF account. This can be done via Voluntary Provident Fund (VPF). The rules regarding VPF and EPF are the same. The interest earned is also exempted from tax.
  5. After one stops working, can they still contribute to EPF?
    According to EPFO, an employee cannot contribute to EPF account they stop working. Any contribution by the member must be matched with the employer's share of contribution.
Click here for all the information and analysis you need for tax-saving this financial year

Also Read

Labour Ministry allows EPF withdrawal amid lockdown

Govt proposes to relax EPF withdrawal rules

How to apply online for advance from your EPF corpus

When can you prematurely withdraw from EPF?

When does your EPF become taxable?

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