Employee Provident Fund (EPF) - Rules & Income Tax Benefits

epf accunt main features

Employee Provident Fund is a small saving scheme that is offered to Indian workers as well as international workers through the EPFO of India. The scheme allows accumulation of funds as well as accrual of interest on the accumulated funds. Under EPF scheme, an employee has to pay a certain contribution towards the scheme and an equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer's contribution with interest on both, on retirement.

The aim of the EPF scheme is to promote retirement savings for employees across India. The Employees Provident Fund (EPF) is a corpus of funds built through regular, monthly, contributions made by an employee and his/her employer. The principal and the interest earned have a sovereign guarantee and the returns are tax-free. Therefore, anyone looking for a safe investment option to save taxes and earn guaranteed returns should enroll for EPF account.

Universal Account Number (UAN) system was started in October 2014 to allow portability of provident fund accounts of employees in case of change of employment. The 12-digit UAN is also helpful in keeping track of the provident fund account details and allows a centralised login to conduct many additional functions related to a provident fund account.

Main Features of EPF

Eligibility : Establishments with 20 or more employees have to provide PF to their employees. Mandatory for employees with monthly salaries greater than or equal to Rs 15000.

Liquidity : Can withdraw PF balance after 2 months of leaving job and if does not take up employment within two months with an employer covered by PF Act.

Rate of Interest : Interest rate on EPF is subject to revision every year.

Investment Limit : Both employer and employee have to contribute a minimum 12% of Basic Pay + D.A.

Tax Treatment : Entire PF balance (including interest) is tax-free if withdrawn after continuous service of 5 years.

Lock In Period : Till retirement or Job Change

Tax Benefits provided to EPF

Tax benefits available on these accounts make these investment options very attractive, especially for those using this scheme to build a retirement corpus.

epf tax benefits

Section80C Benefits - Employee's contribution made in EPF account are eligible for deduction under Section 80C subject to a maximum of Rs 1.5 lakhs in a financial year.

Tax Free Returns - EPF deposits fall under the EEE (Exempt, Exempt, Exempt) tax category. Deposits, Interest earned and Amounts withdrawn at time of retirement from the account are exempt from tax. Withdrawals at maturity or beyond 5 years of continuous years are also tax-free.

Rules for Employee Provident Fund (EPF)

Who can open?
- EPF account can be opened only by an employer on behalf of the employee in India.
- Any organizations employing a minimum of 20 workers are liable to give PF benefits to their workers. Employees of an organization are directly eligible for availing Provident Fund, insurance benefits as well as pension benefits since the day from their having joined the organization. 
- Employees need to become an active member of the scheme in order to avail benefits under this scheme. 
- This scheme does not cater to the needs of people residing in Jammu and Kashmir.

Number of accounts allowed    
- Multiple EPF accounts are allowed.
- In October 2014 One Member - One EPF Account service was started by EPFO. With the help of this service, you can consolidate all your PF accounts with the help of one unique 12-digit number called the UAN.

Where to open?
Any establishment can register using Online Registration facility on Shram Suvidha Portal. This portal is to facilitate establishments, employers or principal employers to submit application for Registration under Labour Laws Online line EPF Act, ESI Act, CLR Act, BOCW Act, ISMW Act etc.

Contributions by Employee
- The contribution paid by the employee is 12% of basic wages plus dearness allowance plus retaining allowance. For example, if the monthly basic salary is Rs 30,000, the employee contribution towards his or her EPF would be Rs 3,600 a month ( 12 percent of basic pay) 
- In the case of establishments which employ less than 20 employees or meet certain other conditions, the contribution rate for both employee and the employer is limited to 10 percent. 
- Voluntary Provident Fund (VPF) - Employee can voluntarily pay higher contribution above the statutory rate of 12 percent of basic pay. This VPF also earns tax-free interest. However, the employer does not have to match such voluntary contribution.

Contributions by Employer
- The contribution paid by the employer is 12% of basic wages plus dearness allowance plus retaining allowance. For example, if the monthly basic salary is Rs 30,000, the employer contribution towards his or her EPF would be Rs 3,600 a month ( 12 percent of basic pay) 
- In the case of establishments which employ less than 20 employees or meet certain other conditions, the contribution rate for both employee and the employer is limited to 10 percent. 
- The minimum contribution is now set at 12% of Rs.15,000 = Rs.1,800 i.e. Rs.1,800 from the employee and Rs.1,800 from the employer. (It was earlier at 12% of Rs.6,500 p.m. = Rs.780).
-  A part of the employer contribution goes towards pension and insurance and also administration costs.

Click here to check present rates fixed for employee and employer contribution.

Interest on deposits
- Interest rate on new deposits is subject to revision every year.
- Interest in EPF is calculated on the basis of monthly running balance. 
- If an EPF account is deemed inoperative, interest will no longer be credited to it.
- Interest is not payable on withdrawn amounts.
- Interest is not payable on the amounts directed towards EPS by the employer.
- Click here to check Interest Rate in Past

Account Operations
- An EPF account can be left active even after leaving employment as interest continues to be earned and credit for up to 3 years even if contributions have stopped. 
- After 3 years the account becomes inactive.
- If new employment has not been found within these 3 years, it would be advisable to withdraw and settle the account.

Conditions for Early Withdrawals
Individual may borrow or make withdrawals from their EPF account under certain conditions. The details are mentioned below:
- Purchase of a land or a plot or building a house for residential purpose.
- Making payments for expenses towards medical treatments
- Funding a wedding
- Funding Education
- Unnatural conditions

Maturity and Final Withdrawl
- According to the EPF Act, for claiming final PF settlement, one has to retire from service after attaining 55 years of age. The total EPF balance includes the employee and employer contribution, along with the accrued interest. 
- Employees can even claim final settlement of EPF accounts when they leave service and do not join another establishment. 
- For employees who resign or are discharged, a waiting period of 2 months is applicable to make withdrawal and settle his/her EPF account. 

Tax on early withdrawals
- Withdrawing the PF balance without completing five continuous years of service has tax implications. 
- The total employer's contribution amount along with the interest earned will get taxable in the year of withdrawal. 
- The amount of deduction claimed under Section 80C on employees contribution will be added to one's income in the year of withdrawal. 
- The interest earned on one's own contribution will also be subject to tax.
- No tax is deducted if the employee withdraws PF after five years of continuous service.

Five years Continuous Service
If one has switched jobs in less than five years but transferred the EPF to the new employer, it will be counted as continuous service.

For instance, someone works for 2 years and then join another organisation and transfers his PF balance to the new employer. He continues to work for another 3 years with this employer. It will be considered as five continuous years of service for the employee. 

Transfer EPF account
As the EPF account is associated with an employer, therefore when an employee changes employers, there arises the question of withdrawing or transferring their EPF accounts. EPF account balances (including the interest earned on contributions to the PF account) can be transferred from an employee's old establishment to the new one. 
- It's better to transfer your PF account when you switch jobs. 
- TDS shall not be applicable in case of PF transfer from one account to another. 
- EPF account balances from past employers to present employers can be transferred both offline and online.
- With UAN number, managing an EPF account and even PF transfer and withdrawals have become much easier than before.