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EPF Contribution

Employees Provident Fund (EPF) is a popular scheme launched under the Government of India’s supervision and regulated by the Ministry of Labour in India. The main aim of this scheme is to build a sufficient and balanced retirement corpus of an individual with inculcating the habit of saving in the salaried class persons. However, this Employee’s Provident Fund includes the monetary contribution from both the employee and the employer and each of them contributes an equal share of 12% every month of the employee’s basic salary (Basic + Dearness Allowance) towards this fund. 

Thus, after the retirement of an individual, he/she will receive the entire contribution of both the employer and the employee as a lump sum amount including all the interest rates in it. The earned rate of returns in EPF is fixed including the tax-free interest and is set by Employees’ Provident Fund Organization (EPFO). Though, the best part of this scheme is that there is a mandated contribution of the Government of India in this scheme. Therefore, it is considered as an investment with low risk as the Government is also included in this scheme and manages it.

EPF Contribution

What is EPF Contribution?

The EPF contribution in EPF schemes refers to the equal monetary contribution of both the employer and the employee towards this scheme every month. The actual amount calculated in EPF contribution is based on the employee’s dearness allowance and basic salary. However, in most cases, the employee’s PF contribution towards his/her basic salary is 12%. To discuss the details of the employer and the employee’s contribution towards the PF is explained below.

Employer’s Contribution towards EPF

The employer contributes a share of 12% of the employee’s salary towards his/her EPF every month. Though the contribution of the employer towards the EPF are categorized in the following ways:

The Employer’s EPF contribution can be 10% only in certain circumstances. Hence, it is applied in the following cases.

  • If a company incurs losses more than its entire net worth.
  • If a company is associated with the products such as bricks, jute, beedi, guar gum, or coir industry.
  • If a company has a total number of fewer than 20 employees.

However, the employer’s contribution towards the EPF may vary in the case of women employees. As discussed in the Union Budget 2018-2019, new women employees can only make the contribution of 8% instead of 12% towards their EPF every month. Though, this benefit is only provided to the first three years of employment to the women employees. Therefore, there are the following reasons for this revision. They are-

  • To bridge the gap of the women employees, this encourages the companies to hire more women.
  • It also enables the women to take higher home pay.

Even though, the employer still has to maintain his/her contribution of 12% while a woman employee makes the contribution of 8% only towards her EPF every month.

However, if an employee switch job, it is paramount to update the EPF information with the new employer of the company to continue their contribution towards the EPF scheme as the EPF will only continue as long as the salaried employees are active to their work.

Employee’s Contribution towards EPF

When the employer itself deducts the employee’s salary up to 12% directly from his/her basic salary and dearness allowances to contribute to EPF every month, then the entire contribution goes to the employee’s EPF account. However, the rate of the employee’s contribution is fixed at 10% in certain circumstances that are listed below.

  • The operating wages limit of the organization is under Rs. 6500 only.
  • If it is brick, jute, guar gum, coir, or beedi industry.
  • If the company is suffering from annual losses more than its net value.
  • According to the BIFR, if the industry is declared to be the sick industry.
  • If the total number of workers is less than 19.

Employee & Employer Contributor under EPF Scheme

The contribution of the employer and the employee towards the EPF scheme

Contribution. Percentage contributed monthly.
Employee 10% or 12%
Employer 12%
Total 24%

Features of EPF Contribution

The EPF scheme is one of the largest savings and retirement schemes that is available to the Indian employees under the specification of the Government of India and has the equal monetary contribution of the employee and the employer every month. Some key features of the EPF contribution are mentioned below.

  • Helps in the retirement period: the accumulated fund under this scheme provides relief to the retired employee at the time of retirement in the form of monetary security.
  • Long-term financial security: the contributed fund deposited under this scheme cannot be withdrawn easily and hence ensures the savings of the individual.
  • Helps at the time of unemployment: if in case, the employee losses his/her current job due to any reason. So, during that time an employee can use these contributed funds to meet their basic requirements.
  • Helps to meet unseen circumstances: in case of any unseen emergency or circumstances that happen then, these contributed funds can be used by the employee to meet his/her urgency and with the help of the withdrawal option, an employee can withdraw his/her contributed premature funds. 
  • Death: in case of the employee’s death, the contributed amount along with interest is provided to the nominee of the employee to help his/her family at the time of difficulty.
  • Quitting the job/ Resignation: the employee if post-resignation is free to withdraw his/her EPF contributed fund of up to 75% after the date of having quit the job of one month and the remaining 25% will be withdrawn after two months of unemployment.
  • Lay off: in case of sudden retrenchment or lay off from the job, these contributed funds may be used until the time the employee gets another suitable job.
  • Disability of the employee: if there is a situation when the employee is not in the condition to work, then at that time these contributed funds may be used by him/her to get over the difficult time.
  • Insurance scheme: this act regulated by the Government of India also provides many provisions to the employee where the employer is mandatory to make a certain contribution towards the life insurance of the employee in which insurance group cover is not presented. Hence, this scheme ensures the employees to be insured properly.
  • Pension scheme: the employer plays a vital role in not only contributing to the PF funds of the employees but also makes the necessary contribution towards the pension of the employee that can be further used in the post-retirement period of the employee.

EPF Contribution Interest Rate

The EPF interest rate is reviewed annually by the EPFO and once the EPFO notifies the EPF interest rate during one financial year then the interest rate is thus calculated on the monthly basis closing balance and after that for the entire year. Hence, the EPF interest rate for the financial year of 2020=21 is 8.50%.

However, the year in which the new interest rates are announced will be valid for the next financial year. i.e, starting from the 1st April of one year to ending on 31st March of the next year.  The points given below are very essential to know about the EPF contribution interest rates. Let’s have a look at these points.

  • The employee shall not receive any specific interest in the Employees Pension scheme that is contributed by the employer towards the employees. Though, the pension is thus paid out of the contributed amount only after the age of retirement.
  • As per the member’s slab rate, the interest earned is taxable on inoperative accounts.
  • If the employees are not attaining their retirement age then the interest will be offered to the employee’s inoperative accounts.
  • If in case, the contribution is not being paid for the thirty-six months on the EPF account of the employee continuously then, the account becomes inoperative or dormant

EPF Contribution Calculation

Assuming that an employee has started his/her contribution towards EPF from March 2019.

Starting the month of contribution March 2019
Interest Rate (p.a) 8.50%
Interest Rate per month 8.50/12 = 0.7083%
Contribution of the employee 12% of Rs. 15,000 = Rs. 1,800
Contribution of the employer Rs. 1,800 including 3.67% in EPF AND 8.33% in pension
The actual contribution of the employer towards the EPF account 3.67% of Rs. 15,000 = Rs. 550
Total contribution in EPF account per month Rs. 1,800 + Rs. 550 = Rs. 2,350

Hence, the calculation of the balance of the EPF account for the next month (April) will be calculated in the given manner:

  1.  The balance will be carried forward from March 2019 = Rs. 2,350.
  2. Interest earned for April 2019 = Rs. 16.75.
  3. Balance at the end of the April 2019 = Rs. 2,350 + 2,350 = 4,700

Frequently Asked Questions

Q1. Is there is tax-exemption for both the employer and the employee’s contribution to my EPF account?
Ans. Yes, the contribution made by the employer and the employee is tax exempted though the tax calculations are different for both. As the contribution of the employer is considered as part of the employee’s taxable income to the EPF account. Therefore, the contribution of the employer is tax-exempt as its source. 

Whereas, the contribution of the employee is calculated as part of the employee’s taxable income. However, under Section 80C, the employee’s contribution is tax-deductible up to a maximum amount of Rs 1.5 lacs per annum. Therefore, the employee’s contribution towards his/her EPF account is considered eligible for tax-exemption under Section 80C only. 

Although, if there is a situation where the employee wants to withdraw the EPF funds before the period of 5 years of contribution then, both the employer as well as employee’s shares become taxable.

Q2. How to claim Employees Provident Fund?
Ans. To claim EPF, the employee must use to go to the EPF E-Sewa Portal or EPF Member’s Portal to log in by using their UAN and after that must go to “Online Services” to withdraw the funds.

Q3. How much percentage is deducted from the salary of the employee to make EPF contribution per month?
Ans. The 12% is deducted from the salary of the employee to make the EPF contribution per month. In addition, Employee State Insurance Corporation (ESIC) is also deducted at 1.75% on the gross salary from the employee’s contribution, and 4.75% is also deducted from the employer’s contribution.

Q4. If the death occurs of the employee due to health-related issues, then is it possible to provide the EPF amount that will be paid to any of the family members of the employee?
Ans. If in case, the subscriber of the EPF dies pr expires, then the legal heir, guardian (in case of a minor) or the nominee can get the EPF amount. All the person needs is to claim the EPF amount by submitting all the documents required including the EPF composite form, the Death certificate of the subscriber, etc.

Q5. When and up to how much EPF amount can be withdrawn by an individual?
Ans. EPF amount can be withdrawn only at the time of emergency, retirement, or in the case of unemployment for two months. EPFO allows the withdrawal of the amount of 75% only after one month of unemployment of the EPF corpus as per the new rule initiated by the EPFO. Although, the remaining 25% will be transferred to the new EPF account only after switching to the new employment.

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