About Provident Fund
Explore the meaning, necessity and the benefits of Employee Provident Fund.
Employee Provident Fund (EPF), or simply PF, is a Government of India-mandated and Ministry of Labour-regulated savings scheme for private sector employees.
Provident funds were first introduced as part of the Employee Provident Fund and Miscellaneous Provisions Act, 1952, and are managed by the
.EPFO is responsible for fixing the rate of interest that PF accounts earn. The EPFO also:
- Maintains the EPF accounts.
- Makes the modifications as per the submitted forms.
- Regulates contributions and tax implications.
EPF encourages private sector employees to save and build a retirement corpus. The employer and the employee each contribute 12% of the employee’s basic salary and dearness allowance towards the employee's PF account. As EPF is a government-backed scheme, it is considered to be a low-risk investment.
Any private sector employee earning less than ₹15,000/- per month is eligible for EPF. People who earn less can save money this way; although, any salaried person is eligible to contribute to EPF.
Once the employed individual reaches the age of retirement at 58 years, they can withdraw the total amount, including interest earned, as a lump sum.
-
EPF enables individuals to save money: For employees who earn less than ₹15,000/- per month, EPF is mandatorily enabled to encourage savings.
-
It provides financial security: Savings accumulated in PF create wealth for the employee that they can withdraw at the time of their retirement. EPF is an investment that secures the employee's life post-retirement.
-
It enables capital appreciation: PF account earns 8% to 8.5% interest. It continues to earn interest even when the employee is not contributing to their PF.
. -
The interest earned on EPF is non-taxable: Unless the total interest earned in an year exceeds a specific limit, the PF earnings are not taxable. In that way, EPF is an excellent tax-saving scheme.
-
It has a Universal Account Number (UAN): Whenever the employee switches jobs, the PF account number changes, but the UAN does not. This allows the employee to accumulate their savings in one account.
-
Withdrawal is easy, though chargable: Employees can withdraw a full or a partial amount of their EPF before the maturity date, that is, the date of retirement; provided that the conditions for withdrawal are fulfilled. Reasons like wedding, education, death, pursuing higher education, medical emergencies, unemployment and the like, can allow premature withdrawal.
Some exceptions apply to EPF scheme based on certain conditions, as explained below.
EPF is not compulsory for people earning above ₹15,000/- per month.
- In such cases, EPF becomes a tax saving investment avenue for employees. Employer’s contribution towards EPF also carries some tax exemptions.
- It becomes voluntary for the employee to stay in the scheme at that point, and can contribute more than 12% towards EPF if they choose to.
Neither all interest earned on PF, nor all contributions made to EPF, are exempt from tax.
- Employer’s contribution to EPF exceeding ₹7.5 Lakhs, and interest earned on employee’s contribution exceeding ₹2.5 Lakhs in a year becomes taxable.
- Inactive PF accounts are accounts that do not receive PF contributions for more than three continuous years. Such accounts continue earning interest but the interest becomes taxable after the 3rd year.
- Sometimes, premature withdrawal of EPF is not tax-exempt. When the employee withdraws some amount within 5 years of service and withdraws over ₹50,000, they can incur a 10% TDS.
Was this page helpful?