Employees’ Provident Fund—commonly called PF—is a retirement benefit scheme that is available to all salaried employees.
It is a very important tool of retirement planning. The tax-free interest (compounding) and the maturity ensures a good growth of our money.
Both employees and the employer contribute to PF at the ‘rate of 12%’ of
the basic wages and dearness allowance (if any) per month. Thus, the
total contribution to PF is 24% per month. PF provides retirement
benefit to us to secure a better standard of living at retirement.
However, there are many things about
EPF
which most of us are unaware of. The below article provides you more
information about EPF such as how the contributions are calculated based
on basic salary and DA, what are the EPF interest rates, what is
pension scheme, etc.
EPF & EPS
Most organisations today offer the facility of PF.
EPF
(Employees’ Provident Fund Scheme 1952) and EPS (Employees’ Pension
Scheme 1995) are the two different retirement saving schemes under
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, meant
for salaried employees. It is mandatory for every employee drawing a
basic pay of up to Rs. 6,500 per month to make contribution towards
EPF & EPS. However,
employees drawing basic salary over Rs. 6,501per month have an option to get PF deducted from their salary.
Normally, both the employer and employee contribute 12% each of the
‘basic salary’ of the employee plus DA (if any). The entire 12% of
employee’s contribution is added towards EPF, while 8.33% out of the
total 12% of the employer’s contribution is diverted to the EPS or
pension scheme and the balance 3.67% is invested in
EPF.
However, if the basic pay of an employee exceeds Rs. 6,500 per month,
the contribution towards pension scheme is restricted to 8.33% of Rs.
6,500 (i.e. Rs. 541 per month) and the balance of employer’s
contribution goes into
EPF.
Thus, the employer contributes only up to Rs. 541 per month (8.33% of Rs. 6,500 in the employee’s pension scheme account.
Contribution to EPF & EPS
| Scheme |
Employee’s contribution of basic pay |
Employer’s contribution |
| EPF |
12% |
3.67% |
| EPS |
— |
8.33% |
Let’s assume, your basic pay is Rs. 10,000 per month and your basic rises 5% each year. Interest rate on
EPF
is credited annually at the end of financial year. Your contribution to
EPF is 12% of basic pay, and the employer’s contribution to
EPF is 3.67%. The rate of interest for the financial year
2012-13 is 8.6% per annum. The
accounting period of PF is from March to February every year. The
government credits the interest compounded on PF balance in April every
year.
Understanding EPF calculation
| Yrs |
Monthly basic (Rs.) |
Yearly basic (Rs.) |
Employee PF (Rs.) |
Employer PF (Rs.) |
Total EPF (Rs.) |
Interest rate |
EPS (Rs.) |
Total amount (Rs.) |
| 1 |
10,000 |
1,20,000 |
14,400 |
7,908 |
22,308 |
8.6% |
6,492 |
24,226 |
| 2 |
10,500 |
1,26,000 |
15,120 |
8,628 |
23,748 |
8.6% |
6,492 |
25,790 |
| 3 |
11,025 |
1,32,300 |
15,876 |
9,384 |
25,260 |
8.6% |
6,492 |
27,432 |
Interest on EPF
The
EPF interest rate is decided by the central government with the consultation of Central Board of Trustees. The
EPF interest rate notification is available on the official website of
EPF India
on an annual basis. For FY12-13, the interest calculated on EPF is
8.6%. The contribution is made to EPF on monthly basis, while interest
is calculated at the end of the financial year.
At the beginning of the each fiscal, there would be an opening
balance, the amount accumulated till then. Thus, for next fiscal the new
opening balance would be: Old opening balance + monthly
contribution throughout the year + interest (old opening balance +
contribution).
For
EPF,
compound interest is paid on the amount standing to the credit of an
employee as on 1 April every year. However, EPS being a pension scheme,
interest is not applicable. Hence, no interest is earned on the amount
accumulated in EPS.
Nomination
EPF also has
nomination facility. You can nominate your mother, father, spouse or children. However you can’t nominate your brother or sister for
EPF. The nominee will be contacted at the time of death of the employee and handed over the
EPF money. If a member has a family at the time of making a
nomination, the
nomination should be in favour of one or more persons belonging to his family.
Any n
nomination
made by such member in favour of a person not belonging to his family
shall be invalid. A fresh nomination should be made by the member on his
marriage and any nomination made before such marriage will be deemed to
be invalid.
Nomination is essential.
The
purpose of appointing a nominee is to have someone who is trustworthy
and responsible to handle the nominator’s assets after his death.
Tax benefits
The employer contribution is exempt from tax, while an employee’s
contribution is taxable but eligible for deduction under Section 80C of
Income tax Act. The money which you initially invest in
EPF, the interest you earn and, finally the money you withdraw after a specified period (5 years), are all exempt from income tax.
Transfer of EPF & EPS
You can apply for withdrawing
EPF only if you are not employed for two months after leaving the previous job. It is recommended to transfer
EPF account at the time of joining a new company instead of withdrawing it as
EPF forms the debt part of your portfolio and gives good tax-free returns.
According to Suresh Sadagopan, Founder, Ladder7 Financial Advisories,
employees changing their jobs should transfer their EPF corpus and do
not withdraw it.
EPF is currently offering 8.6% annually, which is not taxable. Hence, it is best to stay invested in. If you withdraw the
EPF
amount before completing five years of service with an employer, the
corpus withdrawn is taxed. The amount is added to your salary income and
taxed accordingly. On the other hand, if left untouched, it is
completely tax-free.
For example, you have a PF account for the last five years and change
your job and withdraw the PF amount, then all your previous years income
gets recomputed from the very beginning and is taxable. This means the
tax benefits which you had received for the last five years will get
forfeited—and now your withdrawn PF amount is taxable. Further the
employer contribution and interest received will be added to your
current income subject to relief under Section 89.
For EPS, if the service period is less than 10 years, you have an option
to either withdraw your corpus or get it transferred by obtaining a
‘scheme certificate’, if there is a break in service. This way the
number of years of service that you have put in gets transferred to the
new account that you open in the new organisation.
For service below 10 years, you usually get 100% of your
EPF & EPS amount invested. In case of
EPF,
you get the accumulated amount plus the interest (which is 8.6% for
FY12-13). For EPS, you get your EPS amount invested over the years and
the “withdrawal benefit”. The below table D shows the “withdrawal
benefit” which an employee will get if he withdraws his EPS amount (from
six months to nine years).
EPS withdrawal benefit
| Return of contribution on exit from the employment |
| Year of service |
Proportion of wages at exit |
| 1 |
1.02 |
| 2 |
1.99 |
| 3 |
2.98 |
| 4 |
3.99 |
| 5 |
5.02 |
| 6 |
6.07 |
| 7 |
7.13 |
| 8 |
8.22 |
| 9 |
9.33 |
Note: The above table is based on a flat addition in benefit.
For instance: An employee exits from employment after four years of
service his wage on exit is Rs. 5,000, (Return of contribution will be
Rs. 5,000 x 3.99 of wages on exit) i.e., Rs.19,950. Once, an employee’s
service period crosses 10 years, the withdrawal option ceases.
Abhishek Bade, Assistant Manager-HR, IIFL, explains, “To withdraw from
EPS, an employee needs to contribute at least for six months. He has to
fill Form No. 10 C (E.P.S) to claim withdrawal benefit. However, if the
employee completes 10 years of the service, the withdrawal option ends.
Thus, after 10 years of completion of the service, the employee cannot
withdraw from his EPS.”
EPF withdrawals
EPF
withdrawal is not permitted if you are still working. But there are
occasions when EPF withdrawal is allowed. You cannot withdraw it fully,
but you can avail non-refundable advance for the purpose of your
children’s higher education and their marriage. You can also withdraw
for medical treatment for self or family, repaying your home loan,
construction of house, purchase of flat, etc. You can avail the
non-refundable advance, only after having completed minimum five years
PF membership.
Receiving pension
An employee can start receiving pension under EPS only after rendering a
minimum service of 10 years and attaining the age of 58 or 50 years.
However, no pension is payable before the age of 50 years. Early
pension—that is an employee receiving after completing 50 years of age
but before 58 years—is subject to reducing factor @ 4% (from September
2008) for every year falling short of 58 years. In case of death /
disablement, the above restriction is not applicable.
The pension amount is payable to the eligible subscriber till he
survives. On the death of the employee, members of his family—whom he
has nominated—are entitled for the pension.
Maximum pension
Under EPS, the monthly pension is decided on the basis of ‘pensionable service’ and ‘pensionable salary’.
The formula to calculate pension is:
Monthly pension = (Pensionable salary X Pensionable service) ÷ 70
The amount of pension you get depends upon a fixed formula, which is
average monthly salary of the last year of service multiplied by the
number of years of service divided by 70. Remember your employer shows
your salary as Rs. 6,500 for EPS, so the pension is calculated on a
monthly salary of Rs. 6,500. So if you have worked for say 35 years,
your monthly pension will come to Rs. 3250 [(Rs. 6,500 X 35 years)] ÷ 70
according to the formula. Thus, the maximum pension per month is
subject to maximum of Rs. 3,250 per month.
The amount of pension is too less. If you invest Rs. 541 in a recurring
deposit (compounded on monthly basis) at 8% interest rate per annum for
35 years, you would get Rs. 12,40,990 as maturity value. If this
maturity amount is used to purchase an immediate annuity plan offering
over 7% returns p.a., the monthly pension would be Rs. 7,239 which is
much more than twice of Rs. 3,250.
You can invest more in PF
Have you heard of the possibility where you can invest more than the
mandatory 12% into your PF account and get returns on it? Yes, you can
always invest more than 12% of your basic salary in
EPF
which is called VPF (Voluntary Provident Fund). Apart from contributing
the normal 12% of your basic pay, you may choose to put in an extra,
say 10% of your salary into the same account. In this case the excess
amount will be invested in EPF and you will get the interest @ 8.6%.
EPF
contribution is one of the best and least risky ways for salaried
people to build their retirement nest. But remember, your employer’s
contribution will be limited to the amounts payable on a monthly pay of
Rs. 6,500 including basic + DA. It is not compulsory to employer, to
match your voluntary contribution.
