Important Points to Know About EPF
EPF stands for employee provident fund. It is compulsory for salaried people working in organisations that are registered under the Employees’ Provident fund Organisation (EPFO) to contribute 12% of their Basic +Dearness Allowance in EPF; it is a very good saving tool. The advantages and other important points to bear in mind about EPF are discussed below:
What comprises the EPF?
Apart from the 12% contribution by the employee, the employer also contributes an equal amount which goes towards both the EPF and the Employee pension scheme. There is also a very small component that goes towards EDLI or Employee deposit linked Insurance. In addition to the abovementioned points, the interest that the contributions earn is completely tax-free. The maturity amount that you receive on retirement is not taxed either.
EPF Nomination Rules:
Nomination means that you declare the name of the person to whom you wish to pass on the maturity amount in case of your death.
- For a married male: Wife, Children, dependent parents, his deceased son’s widow & children are the legal heirs who can be nominated.
- For a married female: Husband, Children, dependent parents, her husband’s dependent parents and her deceased son’s widow & children can be nominated.
- For an unmarried person or for a person with no family any person or institution related to him or not can be nominated.
If there is no nomination the amount remains unclaimed. It can also cause problems for your legal heirs later on.
Rules Governing EPS:
- 8.33% of the 12% employer contribution goes towards EPS, subject to a maximum of Rs.541/-
- The pension amount is available only after the age of 58.
- Pension is available only on completion of 10 years and not before that.
- The pension given to the member goes to the family after the death of the member.
- Pension is subject to a maximum amount of Rs.3,250/-.
- The interest paid on the EPF amount excludes the EPS part. During the time of withdrawal both the EPF and EPS are given.
- At the time of withdrawal 100% of the EPF amount is given, but there will be deductions in EPS.
- The return on EPS is calculated as per Table D Below:
Return of contribution on exit from the employment
|
Years of service
|
Proportion of wages at exit
|
|
1
|
1.02
|
|
2
|
2.05
|
|
3
|
3.10
|
|
4
|
4.18
|
|
5
|
5.28
|
|
6
|
6.40
|
|
7
|
7.54
|
|
8
|
8.70
|
|
9
|
9.88
|
From the 10th year onwards you are eligible for pension.
What is VPF?
There is a provision to invest more than 12% in EPF. This scheme, known as Voluntary Pension Fund is purely the employee’s contribution. The employer need not match this contribution, though the interest is accrued on the VPF amount also.
Withdrawal/Opting out Rules:
There is a general belief that a job switch entitles you to withdraw the EPF amount. This is not only a wrong notion, but illegal too! As per the EPF rules, you are allowed to withdraw the EPF amount only after 2 months of quitting the job and you do not have a new job. In the case a member finds a new job then only a transfer is allowed. One can opt out of EPF only at the beginning of the career provided the salary is more than Rs.6,500/-. Opting out at a later date is not possible.
Employee Deposit Linked Insurance:
Every organisation contributes 0.5% of the monthly basic pay, capped at Rs.6,500/-, as premium towards life cover. Companies which have life insurance cover for employees are exempted from EDLI scheme. The downside to this scheme is that the 0.5% that goes towards this fund is too small and insignificant.
Withdrawal towards special events:
While withdrawal from EPF during your working years is not permitted, there are special occasions when such withdrawal can be done. E.g. Withdrawal towards marriage, education of self, children or siblings is allowed provided you have completed 7 years in service. Other occasions when such withdrawal is permitted are as follows:
Medical expense for self or family – The rules in this regard allows you a maximum of six times your salary. You need to show proof of hospitalisation for one month or more with approved leave for that period.
Construction or purchase of house – In this case you should have completed at least five years of service and there is a cap on the amount you can avail. This is capped at 36 times your wages. For buying plot or site it is 24 times your wages. This is allowed only once during your service.
Repair/alteration towards existing house – You should have completed 5 years’ service post construction of the house. The maximum withdrawal possible is 12 times the wages and this also can be availed of only once.
Housing loan repayment – To be able to avail of this you should have completed 10 years of service and the maximum amount is 36 times your salary.
Though there is a provision to opt out of EPF, it is advisable to remain in it as this makes up for a systematic saving scheme and may come in handy during the rainy days.
Contributed By: Aparna K S |
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Aparna has worked for Stock Holding Corporation of India Ltd (SHCIL). She has hands-on experience in various financial products. She also has expertise in various mutual funds, pension policies & other financial products. She is currently a freelance writer on various domains including finance | |
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