Introduction
Employees' Provident Fund (EPF), shortly known as PF, is a corpus collected by Employee Provident Fund Organisation (EPFO) - a statutory body set up by the Employees' Provident Fund and Miscellaneous Provisions Act, 1952. Each month your company deducts a portion of your salary for a contribution towards the Employees’ Provident Fund (EPF) account. This amount comes in handy for immediate and urgent fund requirements or retirement purposes.
Employees of establishments registered under the EPF Act are eligible to invest in the EPF or PF account. The company along with the employee contributes 12% of the basic salary plus dearness allowance to the EPF account every month. The company's contribution is always separate from the employee contribution. Let’s understand EPF in detail and also learn about some of its benefits apart from retirement-related.
What is EPF?
EPF scheme requires an employee to pay a certain amount as a contribution towards the PF account and, simultaneously, an equal contribution is made by the employer. The accumulated contribution from employee and employer along with interest can be withdrawn by the member at the time of retirement.
The primary objective of EPF is to inculcate the habit of savings and a sense of financial security in all members. The interest rate applicable on EPF for the financial year 2019 – 2020 is set at 8.50%. The total accumulated funds in the PF account can earn a certain interest and this is 100% exempted from tax.
The interest earned on the corpus is directly transferred to the Employees’ Provident Fund account. It is calculated based on the rate which is pre-decided by the government in association with the Central Board of Trustees (CBT).
Additional Reading: Public Provident Fund
Benefits of PF Account Apart from Retirement Savings
We all know about the retirement benefits offered by a PF Account. Let’s now understand various other benefits that a PF account can offer apart from retirement-related:
Tax benefits
The employee's contribution to an EPF account is tax-exempt as per Section 80C. Apart from this, the interest rate earned on the accumulated funds is also exempt from income tax. EPF accounts can continue to earn interest even if it is not in use and has remained dormant for more than 3 years. EPF withdrawals are also tax-exempt post completion of five years of continuous service. This is applicable only if the employer does not terminate the business or the employee involuntarily quits the job.
Insurance benefit
PF account benefits also come in the form of the Employees Deposit Linked Insurance (EDLI) Scheme. This insurance cover is provided by the EPFO to all eligible members. Under this scheme, registered nominees receive a lump-sum amount in case of the death of the person insured while still being in service. The EPFO recently extended the minimum assurance limit to Rs. 2.5 lakh, from the previous amount of Rs. 1.5 lakh. The maximum cover offered under this scheme is set at Rs. 6 lakhs.
Employees who have an EPF account are eligible for this scheme. Employees do not need to make any contribution to being eligible. The contribution made by employers is set at 0.5% of the basic salary of the employee or a maximum of Rs. 75 per employee each month. For all other group insurance schemes, the maximum contribution amount is Rs. 15,000 per month.
Premature withdrawal option
EPFO does not encourage the treatment of PF money as a bank account. This is primarily because the social security benefits begin to accrue only if there is continuity in contribution. It allows all members to start making partial withdrawals once 5-10 years of service are completed. The reason for withdrawal could be to meet specific needs such as medical treatment, home loan EMIs and also unemployment in some cases.
For example, a maximum of 50% of an employee's contribution to the EPF account can be withdrawn for reasons such as marriage or education expenses. Members can also withdraw an amount which is maximum 36 times the monthly income plus dearness allowance. This amount can be withdrawn for home construction purposes. EPFO also allows members to withdraw maximum 90% of the total accumulated funds in the PF account for home loan repayment.
Recently, the EPFO also started offering the option of withdrawing a maximum 75% of total PF balance in case a member faces at least one month of unemployment. This is considered as a non-refundable advance since a member can withdraw the amount without closing his or her account. Members can also withdraw the remaining 25% of accumulated funds and make a final settlement of accounts after completing two months of unemployment as per the new provision. They can also choose to keep the account with the EPFO since it can be used while searching for another job.
Higher returns
The EPFO invests 5-15% of investible funds in exchange-traded funds (ETFs). However, these investments do not show up in members' accounts and members also do not have the option of increasing the amount to be invested into stocks. Additionally, 45-50% of the PF funds must be invested in government securities, 35-45% goes towards investment in debt instruments and 5% is set aside for investment in money market instruments combined with infrastructure trusts. Thus, the annual return on PF funds is far lower as compared to the return offered by NPS, since the latter has a more aggressive investing strategy.
The EPFO is known to be working on a software which will help in reflecting the retirement savings that can be earned in cash and segregation of ETF components. It aims to give members an option of increasing or decreasing investments in stocks as per the risk-taking ability of individuals. The Central Board of Trustees, which is EPFO's apex decision-making body, has been helping in exploring such possibilities in the near future. Thus, good things and higher returns are likely to be in store for all PF account subscribers.