What is EPF?
The Employee Provident Fund Organization (EPFO) runs the Employee Provident Fund (EPF) scheme. The scheme aims to provide retirement benefits and social security. But, making contributions to the scheme is not always mandatory for employees.
EPF Eligibility Criteria
- All employees who draw a salary can register for EPF.
- If you are a salaried individual, earning less than INR 15,000 (basic + dearness allowance), it is compulsory for you to register for EPF.
- If you earn more than INR 15,000 per month, you are a non-eligible employee. You don’t need to register for EPF. However, you can voluntarily register after obtaining your employer’s consent and the Assistant PF Commissioner’s approval.
- It is compulsory for any company that has more than 20 employees to register with the EPFO.
- Companies that employ less than 20 employees can voluntarily register for the EPF scheme.
You can opt out of EPF if you are without a PF account number.
You can choose not to make EPF contributions if you have never contributed to the scheme. For this, your salary (basic + dearness allowance) has to be more than INR 15,000. You need to be in your first job and without a PF account number. If you choose this option, the salary you get in hand will be without deductions towards the provident. Fund. There is another scenario where you can choose not to make EPF contributions. If you move to a foreign country, pursuing a new job, you need not make EPF contributions in India.
Procedure to opt-out of EPF:
If an employee wishes to opt out of EPF, they need to fill out Form 11 when they join their first job. They need to furnish a letter addressing their employer in which they state that they wish to opt-out of the scheme. But, if the employee makes even a single EPF contribution, this option ceases to exist.
The employer’s contribution is 12% of the sum of basic wages, dearness allowance, and retaining allowance. The employee needs to make an equal contribution. If the company has less than 20 employees, the contribution rate is 10% for both the employer and the employee. Within the employer’s contribution of 12%, 8.33% goes to the Employees’ Pension Scheme (EPS), and 3.67% goes to the EPF. The entire employee’s contribution goes to the EPF. Along with these contributions, the employer needs to make an additional contribution of 0.5% to the Employees’ Deposit-Linked Insurance Scheme (EDLI).
EPF Eligibility Criteria For Employers
As mentioned earlier, an employer does not need to register for EPF if they have less than 20 employees in their organization. They can also opt-out of the scheme if most of their employees give their consent for exemption. But, in this case, they need to go through many formalities.
Benefits of EPF
EPF, a welfare scheme, ensures that salaried individuals set aside a part of their earnings for their retirement. Many people have their investments and private savings accounts. But, many individuals still may not have the financial knowledge and means to invest in their welfare. Here is where EPF is useful.
The interest you earn on the EPF and your withdrawal are both tax-exempt. You cannot completely withdraw your EPF amount until you are 58 years. But, you can withdraw 90% of your EPF balance if you are close to your retirement and have been unemployed for 60 days continuously.
Should you opt-out of EPF?
When you choose not to contribute, you get a bigger take-home salary. With more disposable income, you can invest more in a variety of investment opportunities, giving you a chance to earn higher returns. While opting out can give you more disposable income temporarily, experts do not recommend doing so for the following reasons.
- You miss out on the employer’s share of EPF contribution.
- The government approved an interest rate of 8.1% for the EPF deposits in FY 2021–22. If you do not choose to contribute to the EPF, you will miss out on this interest on the accumulated provident fund amount.
- Your contributions to PF are tax-exempt under Section 80C.
- You will not be eligible to receive the retirement pension under the EPS.
- You will not receive a lump sum amount upon your retirement.
- You can also not take an emergency loan on your PF amount.
Why is continuous service of five years important?
If you withdraw your EPF balance after completing five years of continuous service, the amount does not attract TDS. As this withdrawal amount is tax-exempt, you need not mention this in your income tax return (ITR).
Can you contribute a higher amount to your EPF?
Voluntary Provident Fund (VPF) is a provision that allows EPF members to make voluntary contributions towards their EPF beyond 12% of their basic salary. This additional amount will earn interest. But, the employer does not need to match the employee’s contribution beyond 12%. The scheme caps the employer’s contribution at 12%.