Retirement planning is very important if you want to create a substantial corpus for your lifestyle expenses post retirement. That is why corporate organizations have various forms of retirement benefits designed for their employees. EPF contribution is one such benefit which almost every employee has. EPF stands for Employees’ Provident Fund and it is an investment scheme under the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act passed in 1952.
While most of you who are employed know that a part of your salary is contributed towards the EPF scheme, here are five main aspects of the scheme which you should know about –
Amount of contribution
The employer as well as the employee each contribute 12% of the basic salary + dearness allowance towards the EPF scheme. If, however, the organisation has less than 20 employees or qualifies under other conditions prescribed in the Employees’ Provident Funds and Miscellaneous Provisions Act, the contribution by both the employer and the employee is reduced to 10% of the basic salary + dearness allowance. Out of the employer’s contribution (12% or 10%), 8.33% is invested in the Employees’ Pension Scheme, subject to a maximum of INR 541/month. The remainder is then invested in the EPF account. The employee can also invest more than 12% in which case 12% would be invested in EPF and the excess would be invested in Voluntary Provident Fund (VPF).
Tax treatment
EPF is a completely tax-free investment scheme. The investments made to the EPF account are tax-free up to INR 1.5 lakhs under Section 80C of the Income Tax Act. The interest earned is tax-free. Moreover, the amount withdrawn after the end of the tenure is also tax-free in the hands of the employee.
Rules of withdrawal
Withdrawals from the EPF scheme are allowed only after the completion of the first five years. The scheme runs till retirement of the employee but partial withdrawals are allowed in special circumstances which include child’s higher education or marriage, building a house, medical expenses, etc. Withdrawals after 5 years are tax-free. Moreover, if the employee has completed 10 years of employment and is unemployed for 60 continuous days, complete withdrawal is allowed.
Interest rate
EPF is a fixed interest earning instrument which does not depend on market growth. The interest rate is fixed by the Employees’ Provident Fund Organisation and reviewed regularly. Interest is calculated on the monthly balance in the EPF account. For the year 2017-18, the interest rate was 8.55% per annum.
Universal Account Number (UAN)
Every EPF account carries a UAN which is a unique number allotted to the employee to identify his EPF account. UAN helps employees to retain their EPF account when they change jobs. Using the UAN the employee can join the EPF scheme of the new employer. Moreover, the employee can also track his investments and balance in the EPF account using the UAN.
If you are salaried, understand the EPF component of your salary as it is an automated investment towards your retirement which also gives you tax benefits.
