The Economic Times
English EditionEnglish Editionहिन्दी
| E-Paper
Search
+

    What is EPF scheme and how to calculate PF balance?

    Synopsis

    The total EPF balance at any point of time includes the employee's own contribution with that of the employer, along with the interest accrued on the contribution made. Here's how your balance is calculated every month.

    ET Online
    ET Calculator Banner
    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 people 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 a month at the time of joining, is not eligible and is called non-eligible employee. Employees drawing less than Rs 15,000 per month have to mandatorily become members of the EPF. However, an employee who is drawing 'pay' above prescribed limit (currently 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 per cent 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 notified by the EPFO, 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 per cent 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 EPF 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?

    With effect from December 6, 2018, the employees can withdraw 75% of their EPF corpus after remaining unemployed for one month and balance 25% he is out of employment for 60 straight days or more. Prior to this, an employee can make such withdrawal only after remaining unemployed for more than 60 days.

    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 Universal Account Number (UAN) is activated and seeded with the KYC details like bank account and Aadhaar number. The claim can be submitted online on the Member e-Sewa portal.

    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)
    UAN is allotted by EPFO. The UAN acts 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/PF Account number) 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/PF account number) 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: How 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 75% of EPF corpus after waiting for one month if unemployed and make a complete withdrawal after remaining unemployed for two months 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 claim can be submitted online on the Member e-Sewa portal, provided Aadhaar is linked to UAN.

    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. With effect from March 27, 2020 the non-refundable advance can also be taken to meet the financial emergencies related to pandemic (e.g. Coronavirus).

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

    10. Special advance scheme for housing
    EPFO has 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

    Points to note
    The money in EPF account is sovereign-backed and the interest earned is tax-free at present. In fact, it enjoys the Exempt, Exempt, Exempt (EEE) status as contributions are deductible from income before tax under section 80C and the total corpus on maturity is also tax exempt subject to certain conditions. Also, the interest accrued in the EPF account is exempt from tax. Financial experts generally advise people to transfer their PF account when they switch jobs and avoid withdrawing the amount till maturity.

    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.

      (With inputs from Preeti Motiani)
    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Also Read

    17 Comments on this Story

    parmodbainsla Bainsla2 days ago
    Hii
    Gautam Kumar34 days ago
    Is EPF deducted if an employee goes on 1 month long holiday?
    Is it necessary to work continuously to get EPF?
    Rajkumar Moharekar99 days ago
    नवीन कंपनी जॉईन केल्यानंतर साधारण किती महिन्याने pf कट केला जातो
    The Economic Times