The Employee Provident Fund (EPF) or commonly referred to as PF has been a reliable investment tool for most employed Indians through their careers.. At retirement, the funds are typically used to generate an income.

What has made EPF more attractive to the prior generations is that it is a savings scheme supervised by the Central Government making it more reliable and trustworthy than private sector investments.

So what is the EPF all about?

Every month you (the employee) can contribute up to 12% (It was reduced to 10% for the months of May, June and July 2020) of your monthly salary towards the EPF scheme.

Your employer has to match the contribution by contributing 12% of your salary as well. However the entire amount is not put into the EPF scheme - 8.33% is contributed to the Employee Pension Scheme (EPS) and 3.67% towards the EPF scheme.

You can also voluntarily opt to contribute more than 12% of your basic pay, however your employer does not have to match this contribution. This is called Voluntary Provident Fund.

In the 2018-19 Union Budget, it was announced that women may contribute only 8% (instead of 12%) towards the EPF scheme for the first 3 years of our employment.

When can I avail of the benefits of the EPF scheme?

If you are an employee of a private or public sector company you can avail the benefits of the scheme.

Your salary must be equal to or less than ₹15,000 per month. If your salary is higher than that and you wish to contribute towards the EPF scheme, you and your employer need to agree and receive permission from the Assistant PF Commissioner.

Any organization with more than 20 employees has to mandatorily extend the benefits of the EPF scheme to its employees. In the case of organizations that have less than 20 employees, the contribution rate for both employee and the employer is limited to 10%.

What is the return I make from the EPF scheme?

The biggest advantage of the EPF scheme is the fixed interest component. For the Financial Year 2019-20 the rate of interest is fixed at 8.5% per annum. The interest is calculated on a monthly balance basis.

While the interest is calculated on a monthly basis, it is transferred to your EPF account on a yearly basis on 31st March of the applicable financial year.

You earn interest only on your contribution to the EPF scheme and your employers 3.67% contribution to the EPF scheme. You will not earn any interest on your employers’ contribution of 8.33% to the Employee Pension scheme.

Can I save tax by investing through the EPF Scheme?

EPF contributions are considered one of the most tax effective investments as –

• Your monthly contributions are exempt from tax

• The interest you earn is exempt from tax and

• The amount you withdraw at maturity or after 5 years of continuous employment is exempt from tax. Even if you have switched jobs within 5 years but transferred your EPF balance to the new employer, it will be counted as continuous employment.

Such exemption can be availed up to a limit of ₹ 1.5 Lakh per year under Section 80C.

If you withdraw money before completion of 5 years of employment, you are taxed on the total employer's contribution amount along with the interest earned in the year of withdrawal. The interest earned on your own contribution will also be taxable.

Tax Deducted at Source (TDS) is also payable at 10% on withdrawals before completion of 5 years of employment.

When can I withdraw from the EPF scheme?

The EPF corpus can be withdrawn completely when you turn 58 years (retirement age) or can be withdrawn by your family in case of your passing on. You can also withdraw up to 90% of your corpus, one year before retirement (only if your age is more than 54 years).

Prior to turning 58 years, you can withdraw your entire corpus only in the following situations -

• On retirement

• If you have been unemployed for more than 2 months

• While switching jobs (duration without a job should be more than two months)

You can partially withdraw your EPF corpus in case you want to pay for a wedding, higher education, purchasing land or constructing/repairing a house and repayment of a home loan.

Switching jobs

When you shift from one job to another, you have 2 options with respect to your EPF contribution.

1. Withdraw 75% of EPF corpus after one month of unemployment, and if still unemployed for 2 months withdraw the balance 25%.

2. Transfer the balance to your new employer

How can I withdraw money from the EPF scheme?

A Universal Account Number (UAN) enables you to withdraw or transfer your EPF contribution balance easily. You can obtain your unique 12 digit UAN by providing your bank account details and Aadhaar number.

Bottom Line

If you are prone to spending and have saving habits that need some work, the EPF scheme is a good way to inculcate the habit of saving for your retirement. Like any good habit, maintaining discipline will pay off by helping you create a corpus for your retirement. The fixed rate of interest is also a plus, in extremely volatile times like these.

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This article is written by Namrata Patel for Basis

Basis is a first-of-its-kind platform, aimed at enabling women to achieve financial independence through expert advice, in-app knowledge Boosters and supportive communities.

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