The Employees’ Provident Fund (EPF) scheme was established with an aim to provide a regular source of income, financial security and peace of mind to employees after retirement. It is a government retirement saving and insurance scheme that is self-financed and contribution-based. It was established through the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952 and is governed by the Employees’ Provident Fund Organization (EPFO).
The EPF scheme makes retirement benefits including pensions and insurance accessible to a large section of the population that may otherwise be pushed into poverty or forced to continue working even after retirement to maintain their quality of life.
If you are looking to offer retirement benefits to your employees, especially those in the low-income ranges, you should consider the affordable and comprehensive EPF scheme. In the blog, we will help you understand the features, processes and other nitty-gritties to consider while choosing to extend the EPF scheme to your employees.
Eligibility Criteria – Who Can Access These Benefits?
The EPF scheme is applicable to all establishments that employ 20 or more employees. However, establishments with fewer than 20 employees can also opt for the scheme voluntarily.
The scheme is applicable to all employees, including those employed on a temporary or contract basis, who earn less than Rs. 15,000 per month. EPF is a mandatory scheme for all employees who work in specific industries such as jute, beedi, brick, and coir.
Employees who earn more than Rs. 15,000 per month but are EPF members, the contribution is made only for the threshold limit. For those earning more than Rs.15,000 and not EPF members, they can choose to enrol in the scheme on a voluntary basis.
Members of the Armed Forces, members of Indian Police Services (IPS), and employees of the Indian Railways who are covered under a separate provident fund scheme are not eligible for the EPF scheme.
Can households and small businesses offer these retirement and insurance benefits to their employees? No. The scheme does apply only to employees in the organized sector. However, with the TankhaPay app, employers can extend the benefits of the scheme to all employees including domestic workers, drivers, helpers, casual labourers, temporary workers, gig and platform workers and so on.
One of the key considerations to make in deciding whether to invest in EPF for your employees are the benefits offered. The EPF scheme offers a well-rounded set of benefits to employees and their dependents. These benefits of this social security scheme include:
Retirement benefits: The primary benefit of the EPF scheme is that it ensures financial security and independence to employees after their retirement. Every month 8.33% of the employer’s contribution goes into the Employees’ Pension Scheme (EPS) which creates a healthy retirement corpus. From the EPS fund, they receive monthly pensions after retirement.
Interest rates: The EPF scheme provides tax-free interest on the deposits made by the employee into their EPFO account. This rate is pre-decided by the government based on different economic, monetary and market factors. The interest rate on EPF deposits for the financial year 2021-22 is 8.5%.
Emergency funds: EPF members can withdraw their entire EPF balance after retirement, or in the case of certain specific conditions such as unemployment, disability, or serious illness. They can make partial withdrawals during their service period to meet personal needs and emergencies.
Life insurance: EPF members are also eligible for life insurance coverage under the Employees' Deposit Linked Insurance (EDLI) scheme, which is a part of the EPF scheme. Every month, 0.5% of the employer’s contribution goes into this scheme. In case of death of an insured person in service, their dependents/ nominees get a lumpsum life insurance of up to Rs. 7 lakhs in addition to monthly pensions of Rs.1000 each to the dependents.
Loan facility: EPF members can avail themselves of a loan against their EPF balance for various purposes such as buying a house, medical treatment, or education.
Nomination facility: EPF members can nominate their family members or dependents as their nominees. In case of the member's death, the nominee receives the accumulated EPF balance.
The returns on the Employees' Provident Fund (EPF) scheme in India are relatively stable and consistent, with the interest rate on EPF deposits being decided by the government every year. Historically, the EPF scheme has provided competitive returns, and the interest rates have been higher than those of most savings accounts and fixed deposits.
The EPF scheme ensures capital appreciation by investing funds through strategic asset allocation in a mix of asset classes such as equity, debt, government bonds, etc., ensuring optimum returns at reasonable risk.
The EPF scheme offers compounded interest, which means that the interest is calculated on the EPF balance every month, and the interest earned is added to the principal amount. The compounding effect ensures that the EPF balance grows faster over time, providing a sizeable retirement corpus for the employee.
Will returns/ benefits be taxed?
EPF contributions are eligible for tax benefits under Section 80C of the Income Tax Act and interests provided are also tax-free. This makes EPF an attractive investment option for employees in India.
Please note that the upper limit on tax savings from EPF is Rs. 1.5 lakhs of earnings from the scheme. Beyond this limit, the earnings from the scheme are taxed.
What are the limitations?
The investments are reliable and secure but offer relatively lower returns than other forms of growth-based investments.
There is an upper limit on withdrawals that an employee can make during their service period. Full withdrawals are only allowed after retirement or in case of long-term involuntary unemployment.
Agricultural workers, self-employed persons and informal workers cannot access these social security benefits. With the TankhaPay app, employers can extend these retirement and insurance benefits to informal employees.
Extent of Coverage: Who Benefits?
The primary beneficiaries of the EPF scheme are the EPFO members – the employees themselves. They gain access to the whole host of retirement and other benefits.
However, in case of their death in service, their nominees will receive the benefits. The nominees could be their spouse, children, dependent parents or minor siblings. A member can nominate multiple people, in which case the benefits will be distributed among them in a percentage specified by the member.
In case the member does not have a nominee, the benefits accrue to their legal heir determined based on the deceased member’s personal laws. The legal heirs are spouse, children, dependent parents, siblings, etc. The accumulated balance and benefits are shared among multiple legal heirs as per the provisions of the Act.
If the legal heir/ nominee is a minor, then the legal guardian (natural or appointed) will receive the accumulated balance. They will be responsible for managing and using the funds till the minor child/ nominee reaches majority.
The Affordability for Employees and Employers
Being a government retirement and insurance scheme, EPF is one of the most affordable and secure investment avenues for employees. While marginally increasing the payable amount for employers, it also requires only marginal deductions from the monthly receivables for the employee. These marginal contributions ensure a sizeable saving, retirement corpus and emergency fund for employees in their times of need.
The rate of contribution for employees is fixed at 12% on the total of basic wage, dearness allowance and retaining allowance. While 12% is the mandatory rate, they can choose to contribute higher too. The employer’s contribution is 13%, divided as:
12% of their basic wage + dearness allowances + retaining allowances
13% of the basic wage + dearness allowances + retaining allowances payable to employees divided as:
8.33% towards the Employees’ Pension Scheme
3.67% towards the EPF scheme
0.5% towards the EDLI
0.5% towards admin charges
In establishments with less than 20 employees and meeting certain conditions, the contribution can be reduced to 10% each for employers and employees.
How Is It Calculated?
The EPF contribution is calculated as a percentage of the employee's basic salary plus dearness allowance (DA) and retaining allowance. For example, if an employee earns Rs. 10,000 per month and their DA is Rs.3,000. The total sum of Rs. 13,000 will be considered for EPF calculations.
Employee’s contribution at 12% of Rs.13,000 – Rs. 1,560
Employer’s contribution at 13% of Rs. 13,000 – Rs. 1,690 divided as:
EPS – 8.33% of Rs. 13,000 – Rs. 1,082.9
EPF – 3.67% of Rs. 13,000 – Rs. 477.1
EDLI – 0.5% of Rs. 13,000 – Rs. 65
Admin charges – 0.5% of Rs. 13,000 – Rs. 65
Payment To the Scheme
The employer and employee both make contributions to the EPF account. The employer will deduct the employee's contribution, add their contribution and deposit the total into the EPF account of each employee.
What Happens to Dormant Accounts?
If an EPF account remains inactive or dormant for a continuous period of 36 months or more, it is classified as an Inoperative Account. When an EPF account becomes inoperative, it stops earning interest and no further contributions can be made to it. The balance in the account remains safe and secure, but it doesn't grow further until it is settled.
To claim the amount in an inoperative EPF account, the individual needs to submit a claim to the EPFO which will verify the claim and settle the account by transferring the balance to the member's bank account.
UAN or Universal Account Number is a unique 12-digit number assigned to every EPF member. The UAN is generated by the EPFO and is a one-time number that remains constant throughout an individual's employment lifetime, even when they switch jobs. It simplifies the EPF process by enabling easy transfer of funds from one account to another, checking EPF balance, submitting claims, etc., regardless of the number of employers an individual has had.
Registration & Compliance
To enjoy the benefits of the EPF scheme and secure the future of the employees, the employer must be registered with the EPFO and must have enrolled their employees. Further, the employer must follow several compliance requirements to avoid penalties and legal action. The TankhaPay app makes the enrolment of employees into the scheme and payments hassle-free and straightforward. Furthermore, the employers do not have to worry about registration or compliance.
The Way Forward
The TankhaPay app enables employers to make social security benefits including retirement, insurance and healthcare benefits accessible to all employees including domestic workers, household staff, casual workers, temporary workers, gig workers, etc. and not just the formal/ organized sector employees. So, even households and smaller businesses outside the purview of the EPF and ESIC schemes can help secure the future of all their employees.