The Employee Provident Fund or EPF is a scheme set up by The Employees Provident Fund Organisation (EPFO), under the Ministry of Labour and Employment, Government of India and administered by the Central Board of Trustees. It was introduced in 1952 vide the Employees’ Provident Fund and Miscellaneous Act, 1952.
In essence, it states that an organization (irrespective of its structure) having 20 or more permanent employees (across different departments and branches whether located in the same location or otherwise), working in any of 180 plus industries, should mandatorily register with the EPFO.
What is an EPF Account?
The EPF account provides for retirement savings to employees (called subscribers) once the account is opened. By means of regular compulsory contributions, made by you as an employee and your employer, financial support is provided for your post-retirement needs or in case of your, i.e. employee’s incapacitation to continue working either temporarily or permanently.
Your contribution as a salaried individual goes directly into the EPF, while your employer’s contribution goes into the EPF, the EPS (Employees’ Pension Scheme) and the EDLIS (
Employees’ Deposit Linked Insurance Scheme). Here is how it is bifurcated:
- 12% into EPF (This comes out of the employees’ salary – Basic + Dearness Allowance).
- 3.67% into EPF
- 8.33% into EPS
- 0.50% into EDLIS
- 0.85% for EPF Administrative Charges
- 0.01% for EDLIS Administrative Charges
You as an employee do not contribute to the life insurance premium charges. It is borne by your employer. Also, the administrative charges for both the EPF and the EDLIS are borne by the employer.
The contributions made to your EPF Account earn a fixed rate of interest. Historically, EPF interest rates have moved as follows:
|Year||The rateof Interest Announced ||Increase / Decrease / Constant ||% Change |
|2009-10 ||8.50% ||Constant ||0% |
|2010-11 ||9.50% ||Increase ||1.00% |
|2011-12 ||8.25% ||Decrease ||-1.25% |
|2012-13 ||8.50% ||Increase ||0.25% |
|2013-14 ||8.75% ||Increase ||0.25% |
|2014-15 ||8.75% ||Constant ||0% |
|2015-16 ||8.80% ||Increase ||0.05% |
|2016-17 ||8.65% ||Decrease ||-0.15% |
|2017-18 ||8.55% ||Decrease ||-0.10% |
|2018-19 ||8.65% (Proposed) ||Proposed Increase ||0.10% |
(Note: The above table is for illustration purpose only)
And now here’s some good news for you…
The interest rate on your EPF Account is proposed to be increased from 8.55% to 8.65% for the financial year 2018-19. In other words, you would stand to gain by 10 basis points (bps). One basis point is 1/100th of a percentage point.
This move by the EPFO will be beneficial for you and millions of EPF subscribers to build a retirement corpus. It would prove rewarding and compete with the rate of interest on other small saving schemes viz. Public Provident Fund (PPF) (which can also be linked with a savings account), National Savings Certificate (NSC), Sukanya Samruddhi Account, and so on.
However, in addition to the compulsory contribution to EPF, it is advisable to also voluntarily contribute via the Voluntary Provident Fund (VPF) to make the best use of your PF Account to plan your retirement.
What is a Voluntary Provident Fund Account?
Under VPF, you can choose to make additional contributions of up to 100% of your Basic and Dearness Allowance (DA), but this will not be matched by your employer –meaning, the employer will be in no obligation to contribute to the VPF Account. And once you choose to contribute to VPF, it cannot be discontinued before the completion of a minimum tenure of 5 years.
The additional contribution to VPF will earn the same rate of interest as declared on EPF for the corresponding financial year.
Further, contribution to VPF is eligible for a deduction under Section 80C of the Income Tax Act, 1961 subject to the maximum limit of Rs 1.50 lakh per annum. However, in case of partial withdrawals from VPF before the completion of minimum tenure of 5 years, the tax will be levied on the accumulated amount.
Partial and complete withdrawals from the VPF Account are permitted in case of any financial emergency, offering you the flexibility.
From your EPF Account, too, you can withdraw the money to meet certain specific expenses (viz. Marriage or education of your children, yourself or your siblings, to repay or partly repay a home loan, for alterations/repairs to your existing house, construction or purchase of a house or flat, medical treatment for yourself or your family, etc.) but that’s subject to certain strict conditions.
If you endeavour to build a respectable corpus for your retirement needs, restrain from withdrawing from your PF Account as far as possible.
In general, both EPF and VPF are tax-free avenues for the salaried class with an Exempt-Exempt-Exempt (E-E-E) status. Meaning, your contributions are deductible under Section 80C, interest earned is exempt and so are the maturity proceeds exempt.
Given the tax status and favourable interest rate, EPF and VPF are worthy avenues to feature in your retirement and tax saving plan. If we consider EPF interest rates since 1981, on an average the return is around 10% -- quite respectable to build a sizeable retirement corpus. Once you resign or retire from service, the final maturity amount is paid to you, the subscriber. And in case of an untimely death, your nominee receives the accumulated amount.
EPF is a safe investment avenue, backed by the Government of India. Make the most of it for your retirement planning.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.