If you are an employee of a private company, you must be contributing to the EPF Scheme. This contribution is done on the basis of a formula. The EPFO has set the EPF contribution rate. You and your employer have to follow this rule. It is mandatory by law. In this post, I would give details of EPF contribution Rate and Rules.
Minimum 12% Contribution by Employee and Employer
You have to deposit a minimum amount to EPF account. It is 12% of your salary. You have to deposit this amount every month. Your employer deducts this amount before paying salary to you.
According to the EPF rule, your employer has to also match your EPF contribution. Thus, it has to also deposit 12% of your salary. This amount goes to your EPF and EPS account.
However, in practice, most of the private employer makes their contribution a part of your CTC. Thus, in a way, whole 24% EPF contribution goes from your CTC salary.
8.33% Goes to Pension Scheme
The employee pension scheme (EPS) runs along with the EPF scheme. A part of the EPF contribution goes to this scheme. Out of 12% employer’s contribution, 8.33% is routed to EPS. The remaining amount goes to EPF account.
There is an upper limit of the pension contribution. It can’t be more than ₹1250/month. This amount of ₹1250 is 8.33% of the 15,000. You may be aware that EPF scheme is mandatory for the employee who earns ₹15,000 or less per month.
Employee Can Increase Contribution
The Minimum 12% EPF contribution is mandatory. But you are free to deposit more than this. You can give a mandate for a higher percentage of contribution. You can contribute up to the 100% of the basic salary. This excess deposit is called as the Voluntary PF contribution.
It is useful when you want better return along with tax benefit. The return from EPF account is 1% higher than the PPF account. Thus, It is the most beneficial and safe tax saving option.
The excess EPF contribution is not mandatory for the employer. It can keep contribution at the rate of 12%.
To avail benefit of higher contribution, you have to give this mandate to your employer. The new rate of contribution would be applicable from next financial year. It would remain same at least for the whole financial year.
The 12% rate is not applicable to your whole take home salary. Rather, the EPF contribution is calculated from your basic salary + DA (It also includes commission if it is given as a fixed percentage of the turnover).
You may be aware that most of the private employer keeps basic salary very low. A big chunk of salary is given as incentives and reimbursements. Thus, your EPF contribution remains low. It may seem beneficial as there is less deduction. But, it also jeopardizes your retirement savings.
Benefit of Tax Deduction
The contribution to EPF scheme gives you tax benefit as well. You can get all round tax saving from this scheme. It comes under EEE (Exempt, exempt, exempt) category of investment.
- The monthly contribution is eligible for tax deduction under section 80C. You can enjoy tax deduction up to 1.5 lakh under this section.
- The annual interest earning is tax also tax-free. Unlike NSC and FD, you are not required to factor in interest for taxation.
- At last, the maturity amount is also exempted from tax. You may be aware that full withdrawal amount of NPS is not exempted from the tax.
The tax benefit of EPF comes with a condition. You have to contribute to EPF account at least for 5 years. If you withdraw EPF balance before completing 5 years, the withdrawal amount would become taxable. You can learn more about the EPF taxation.
Break in Service
As I have told above, the tax benefit of EPF scheme comes with the 5-year contribution. This contribution should be continuous. If there is any break in the service or contribution, your 5 year period would start afresh. Thus, to enjoy the tax-free maturity amount of EPF, you must contribute continuously for 5 years.
In case, you can’t deposit continuously for 5 years, the EPF would deduct TDS at the time of EPF withdrawal. This TDS would be 10% of your amount. It would become 34% if you have not given PAN.
Interest After Non-Contribution
There is the common concern of interest-earning in case you stop contributing to EPF scheme. The reason for this concern is an earlier circular. The EPFO had said that any EPF account which does not get any deposit for 3 years, becomes inoperative. And such account would not earn any interest.
Consequently, you did not get an interest in your EPF account if you don’t transfer or withdraw the balance after leaving a job. But now rules have changed.
According to new rules, you EPF account would always earn interest what if you stop contributing to it.
Investment of EPF Corpus
You would be eager to know that where does your EPF contribution go? How does EPF use billions of rupees from EPF scheme?
The corpus is invested in following instruments.
- Central and state government bonds
- Bonds issued by public sector companies
- Fixed deposits of public sector banks
- Sensex and Nifty ETF of SBI, UTI and LIC
Among all these instruments the first three are the fixed income securities which are considered safe but give lesser return while the fourth one is the indirect investment into the share market. It gives a higher return but risky as well.
As of now, EPF is investing 15% of your new contribution into the ETFs. From 2018, you would get units for this ETF investment. The value of this unit would change according to the share market.
How To Verify Contribution
It is good to keep a tab on your EPF contribution. You can do this by checking your EPF account statement. The EPFO has provided this facility in two ways.
The easiest and best method is the regular SMS update of your contribution. When you activate the UAN, the EPFO starts sending a monthly SMS. This SMS contains your recent contribution detail and EPF balance along with your UAN details.
You can also download your updated EPF passbook. This Passbook is available online at EPF portal. The EPFO has made a separate page to download the EPF passbook. You have to use your UAN and password to view detailed statement. You can learn more about the EPF passbook download.
Concession from Minimum Contribution
The EPF rules give concession from mandatory 12% contributions in certain conditions. The 10% rate would be applicable in the following condition.
- If a company employes less than 20 people.
- A company which is declared sick by the Board for Industrial and Financial Reconstruction
- If a company has accumulated losses equal to or exceeding its entire net worth and
- The company is from any of these sectors
(a) Jute (b) Beedi (c) Brick ( d) Coir and (e) Guar gum Factories
Contribution for EDLI
When you become a member of EPF scheme, you also get the benefit of a life insurance cover. The EPFO provides the death cover to all of its active members. This scheme of life insurance cover is called as the Employee Deposit Linked Insurance Scheme.
This scheme also runs on contribution. The employers have to contribute to EDLI scheme for every employee. The contribution rate for EDLI is .01% of the employee’s salary. The employer has to deposit minimum ₹200 for EDLI scheme, in case its total EDLI contribution does not cross ₹200.
Because of this scheme, the family members of a deceased employee get ₹6 lakhs.
Administrative Expense By Employer
Besides the 12% contribution, an employer has to also contribute for administrative expenses of EPFO. The rate for the administrative expense is 0.85% of the employee salary. Before 2015, it was 1.10%.
Earlier this rate was much higher. But now, because of the online operations, the EPFO could reduce its expense. Therefore, the employers have got the respite.
However, an employer has to deposit minimum ₹500/month as the administrative expense. If the establishment has no contributory member in the month, the minimum administrative
charge will be ₹75.
In case of Establishment is exempted under PF Scheme, Inspection charges @0.18%, minimum ₹5/- is payable in place of Admin charges.
In this post, I have told you all about the EPF contribution. Further, you can also learn about the UAN which has become very useful for the EPF scheme.