When I landed my first job as a journalist, the salary was far from extravagant. However, upon receiving my first paycheck, I was in for a surprise (read – rude shock!) when I noticed a significant deduction labelled as PF—not just once, but twice! As a fresh graduate, I was clueless about these deductions and certainly didn't expect them. Perplexed, I approached the HR department, demanding an explanation for the double deduction. To my disbelief, I was told that this was perfectly in order, and in fact, a mandatory contribution towards my retirement. Retirement? I was just 23 and it seemed completely absurd to me at the time.
Despite my initial confusion and frustration, I soon learned that the Employee Provident Fund (EPF) is a compulsory savings scheme for all salaried employees in corporate organisations with 20 or more personnel. This fund ensures that a portion of employees' salaries is set aside for their future financial security, including retirement.
Although I couldn't grasp the significance at the time, with age and experience, I've come to realise the value of planning for the future. Armed with this knowledge, I've decided to delve deeper into the EPF with Chartered Accountant Abhay Asknani helping me decode all the essential details.
One of the most significant benefits of EPF is its tax-saving feature. ’EPF offers tax benefits, with both the investment amount and interest earned being tax-exempt,’ states Asknani. Additionally, EPF facilitates capital growth through government-set interest rates and monthly contributions. ’This ensures steady capital appreciation, providing a reliable source of income during retirement’ notes Asknani.
How Does The Provident Fund Work?
Step 1: EPF Deductions from Your Salary
If you're a salaried employee, you're familiar with various deductions from your monthly pay. One of these deductions is towards the Employee Provident Fund (EPF), clearly listed on your pay slip. So, how does it work? According to EPF rules, 12 per cent of your salary is directed to your Provident Fund. Your employer is also required to contribute the same amount of 12 per cent, with 8.33 per cent going to the Employee Pension Scheme (EPS) and the remaining 3.67 per cent into your EPF.
Step 2: Pooling of EPF Funds
the entire funds collected from you and your colleagues towards EPF are pooled together and invested by a trust. These pooled funds also generate interest, typically between 8 percent and 12 per cent, as decided by the government. Your EPF keeps growing due to your monthly contributions and the yearly compound interest. Your EPF account remains active until you decide to withdraw it upon retirement.
Step 3: Withdrawal of EPF
There are two main ways to withdraw your EPF:
1. After reaching the age of 58, which is the retirement age, you can apply to withdraw your EPF through your employer.
2. Before reaching retirement age, you can withdraw your EPF if you've been unemployed for one whole month. In this case, you're allowed to withdraw 75 per cent of your Provident Fund. However, it's important to note that the employer's contribution can only be withdrawn after reaching 58 years of age.
Established in 1951 and overseen by the Ministry of Labour and Employment, it helps individuals build a retirement fund. According to Chartered Accountant Abhay Asknani, ’EPF serves as a vital tool to ensure financial security upon one’s retirement and during unforeseen circumstances.’
Managed by the Ministry of Labour and Employment, EPF ensures that every employee receives a Provident Fund (PF) account number, along with a Universal Account Number (UAN) for seamless account management, regardless of job changes.
Every employee receives a Provident Fund (PF) account number from their employer, issued by the EPFO. This alphanumeric code represents the establishment, state, regional office, and PF member code, managed by the PF trust. Additionally, employees are assigned a Universal Account Number (UAN), which remains constant even if they change jobs, unlike the PF account number.
You can easily access EPF services online through the official portal. It's designed to be user-friendly, making it simple to manage your EPF account. This online platform ensures that accessing services is clear, quick, and without any hassle.
Benefits Of The Employee Provident Fund
Tax Savings: The EPF programme offers tax benefits. The amount you invest and the interest you earn are both tax-exempt. If you withdraw the money after five years, it remains tax-free. However, withdrawing your EPF before the five year-period may result in taxes.
Capital Growth: The interest rate for this programme is set by the Indian government. Monthly contributions make it easy to build savings over time. The compound effect helps your savings grow significantly by retirement age.
Retirement Savings: EPF helps you build a substantial retirement fund, ensuring financial independence and stability during retirement.
Emergency Fund: The accumulated funds can be used for unexpected expenses or life events. You can make partial withdrawals from the fund in special circumstances.
Job Loss Support: In case of unemployment, the EPF can cover your expenses. After one month of unemployment, you can withdraw 75 per cent of the fund, and after two months, the remaining 25 per cent can be withdrawn.
