Having a regular source of income and an emergency fund as one ages and retires is crucial. It helps maintain one’s quality of life and standard of living, ensuring that retirees aren’t forced into poverty or forced to work even when their age doesn’t permit. This is where government retirement and insurance benefits schemes like Employees’ Provident Fund (EPF) scheme are extremely beneficial.
Employees’ Provident Fund (EPF) scheme is a self-financed, contribution-based long-term retirement, saving and insurance scheme.
The Employees' Provident Funds and Miscellaneous Provisions (EPF) Act, 1952 defines an employee as someone who is employed for wages/ salary in any kind of work, manual or clerical, in a company or establishment covered under the Act. The employee could get paid directly or indirectly by the employer. So, both permanent and temporary employees are included in the definition and so are those employed through a contractor. The Act also covers certain categories of workers such as apprentices, trainees, and casual laborers, provided they are engaged in work covered under the Act.
As per the EPF Act, an employer is any person who employs 20 or more employees in an establishment, engaged either directly or through a contractor. In some cases, an employer is also an establishment/ factory that employs less than 20 people as per the Act. The employer directly or indirectly pays the employees for their services.
The employer is responsible for making contributions to the Employees' Provident Fund (EPF) on behalf of their employees, deducting the employee's share of the contribution from their salary, and depositing both the employer and employee contributions into the EPF account. In addition, the employer also contributes to the Employees' Pension Scheme (EPS) and the Employees' Deposit Linked Insurance Scheme (EDLI) for the benefit of their employees.
The term member refers to an employee registered in the EPF scheme and is eligible to receive the benefits under the scheme.
Nominee is the person nominated by the member to receive the benefits of EPF Scheme in the event of the member's death. The nominee could be a spouse, children, parents or dependent siblings. It is also possible to nominate more than one person as a nominee and specify their percentage share in the accumulated balance of the fund.
If a member does not have a nominee, then the EPF Act specifies that the accumulated balance and benefits of the scheme will be transferred to the member’s legal heir(s) after the member’s death. The legal heir(s) can be determined based on the member's personal laws, such as the Hindu Succession Act, 1956, or the Indian Succession Act, 1925. The legal heirs can include the spouse, children, parents, and in some cases, dependent siblings of the deceased member.
If there is more than one legal heir, the accumulated balance of the provident fund will be distributed among them as per the rules and regulations of the EPF scheme. The distribution of the provident fund may also be affected by the personal laws applicable to the deceased member. In such cases, the legal heirs may need to provide appropriate documentation and undertake legal formalities to claim the accumulated balance of the provident fund.
A minor is a person who has not attained the age of majority, which is 18 years in India. If a member of the EPF scheme nominates a minor as a nominee, then an adult member of the family should be appointed as the guardian of the minor. In case of a member’s death, the guardian will receive the accumulated balance of the provident fund on behalf of the minor. The guardian can be either a natural guardian, such as the father or mother, or a court-appointed guardian.
If a member does not have a nominee and his/her legal heirs include a minor, then the legal heir who is appointed as the guardian of the minor will receive the accumulated balance of the provident fund on behalf of the minor.
It is important to note that the guardian appointed for a minor should be an adult member of the family who is capable of acting as the guardian and is approved by the EPFO. The guardian is responsible for managing and utilizing the accumulated balance of the provident fund for the benefit of the minor until he/she attains majority.
Under the EPF Act, an establishment or factory is any place of business where 20 or more persons are employed. In certain specified cases, even those premises with less employees are considered establishments/ factories. The definition of an establishment or factory includes:
Any office, including a branch office, or department of a factory or establishment, which is located within the premises of the factory or establishment or at any other place.
Any establishment engaged in any industry specified in the First Schedule to the Act, such as manufacturing, mining, electricity generation, or construction.
Any other establishment notified in the Official Gazette.
It is important to note that establishments or factories with less than 20 employees can also voluntarily register themselves under the EPF Act and provide the benefits of the provident fund to their employees. Once registered, such establishments or factories will have to comply with all the rules and regulations of the EPF Act.
The EPFO or Employees' Provident Fund Organisation is the statutory body established by the Government of India under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952. Launched in 1951, this body is governed by the Ministry of Labour and Employment and is one of the largest social security organizations globally.
The EPFO is responsible for managing and administering the EPF and other schemes for extending retirement, insurance and survivorship benefits to Indian and international workers while promoting savings.
The 3 important schemes offered by the EPFO are:
Employees' Provident Funds Scheme 1952
Employees' Pension Scheme 1995
Employees' Deposit Linked Insurance Scheme 1976
The EPFO is responsible for collecting contributions from the employers and employees of establishments and factories covered under the EPF Act, maintaining records of the contributions, and managing the investments of the contributions in a secure and efficient manner. The EPFO has regional offices and sub-regional offices across India to ensure efficient and effective implementation of the EPF scheme and other social security schemes.
The EPFO also provides various services to the employees such as online access to EPF accounts, transfer of EPF accounts when changing jobs, partial or full withdrawal of funds for emergencies, etc.
The Universal Account Number (UAN) is a unique 12-digit number that is assigned by the EPFO to every member of the EPF scheme upon registration. Employers are required to register their employees for the UAN and provide the UAN to them within a specified time period.
The UAN acts as a centralized number that links together all the member IDs of the EPF scheme that an employee may have during their career. It remains the same throughout an employee's career, irrespective of whether they change jobs or locations within India.
The UAN enables the EPFO to provide various services to the members of the EPF scheme, such as:
Online access to their EPF account, which includes details such as the accumulated balance, contributions made, and withdrawals.
Easy transfer of their EPF account when changing jobs.
Seamless withdrawal of their EPF account balance when they retire or leave the workforce.
Linking of other EPF-related services, such as the Employee's Pension Scheme (EPS) and the Employees' Deposit Linked Insurance (EDLI) Scheme.
Contributions under the EPF Act refer to the contribution payable by the employer and employee towards the EPF and other schemes. Being a self-financed, contribution-based scheme, EPF contributions are mandatory for both employers and employees, but the rate of contribution varies.
For all employees earning upto Rs.15000 (basic wage + dearness allowance), employer and employee contributions are compulsory. When an employee is already an EPFO member but earns more than Rs.15000 as monthly income, the contributions are made only for the first Rs.15000. Contributions are voluntary for non-members earning more than Rs.15000.
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:
8.33% towards the Employees’ Pension Scheme
3.67% towards the EPF scheme
0.5% contribution towards EDLI
0.5% towards admin charges
If the organization has less than 20 employees and meets certain conditions, then the contribution can be limited to 10% for both employees and employers.
The EPF scheme applies to all factories and establishments with 20 or more employees (in notified industries less than 20 employees) across the whole territory of India except for Jammu and Kashmir. International workers and contract workers who are working in establishments or factories covered under the EPF Act are also covered under the scheme.
It is important to note that the EPF Act does not apply to certain categories of employees, such as apprentices, casual workers, daily wage workers and household workers. However, employers can voluntarily extend the benefits of the EPF scheme to these employees using the TankhaPay app. The app enables even individual households and small home businesses to enrol their employees to the EPF scheme and help them secure their future.
The EPF scheme mandates employers to deduct 12% of an employee's monthly income (basic wages + dearness allowances + retaining allowance) and deposit it into their EPFO account as the employee’s contribution. This is known as the EPF deduction. Together with the deposit of the EPF deduction, the employer contributes 13% into the employee’s EPF account.
The EPF deduction is a valuable benefit for employees as it helps them save for their retirement and socio-economic eventualities, and the interest earned on the contributions is tax-free.
The EPFO is responsible for managing the investments of the corpus funds in a secure and efficient manner. To generate optimal returns while maintaining a reasonable level of risk, the contributions are invested in various asset classes, including equities, debt securities, and government bonds, among others. The EPFO decides the strategic asset allocation among these different asset classes based on a number of factors like the current economic environment, market conditions, corpus size, etc.
As of 2021, the EPFO invests up to 15% of the EPF corpus in equities, while the rest is invested in debt securities, government bonds, and other fixed-income instruments. The EPFO periodically reviews the strategic asset allocation and may make changes based on market conditions and other factors.
Basic wages under the EPF Act refer to all emoluments paid to the employee as per the terms of their contract of employment, excluding allowances and other emoluments such as – food concessions, overtime allowances, commissions, bonuses, house-rent allowances, medical allowances, presents, etc. The basic wages together with dearness and retaining allowances are used to calculate the contributions to be made.
Wage period is the time period for which wages are paid to the employee as specified in the terms of the employment contract. This could be weekly, monthly, daily or even for a contract period.
The EPF scheme allows full withdrawal of funds only upon retirement or unemployment that exceeds a period of 2 months. However, partial withdrawal of funds, upto 75%, is possible under the following conditions:
Education or marriage of children
Marriage of self/ sibling
Housing loan repayment – partial or full
Home repairs or alterations
Construction or purchase of a house
Medical treatment of member or their family members
So, EPF serves as an emergency fund for members in times of personal emergencies or socio-economic eventualities such as the Covid pandemic or a natural disaster.
The EPF Scheme ensures capital appreciation for its members by providing a tax-free, pre-fixed interest on the deposits held by EPFO. The government sets and revises this interest rate from time to time based on the revenues earned by the EPFO.
Pensions are an important retirement benefit offered by the EPF scheme. In India, the Employees' Provident Fund (EPF) scheme provides a pension scheme known as the Employees' Pension Scheme (EPS). Every month 8.33% of the employee’s earnings go into this scheme.
To be eligible for an EPS pension, an employee must have been a member of the EPF for at least 10 years and have reached the age of 58 years. The pension amount is based on the employee's years of service and their average salary in the last 12 months of service. The minimum pension amount guaranteed under the scheme is Rs. 1,000 per month.
The pension amount is calculated as a percentage of the average monthly salary and is subject to a maximum limit. The pensionable salary is limited to Rs. 15,000 per month, and the maximum pension amount that can be received is Rs. 7,500 per month.
Each month the employer contributes 0.5% of the basic wages into the Employees’ Deposit Linked Insurance (EDLI) Scheme to extend life insurance benefits to employees. On the death of an EPFO member (in service), their nominee gets a lumpsum life insurance of up to Rs. 7 lakhs. In addition, the widow/widower and dependent children of the deceased EPFO member receive monthly pensions of Rs.1000 each.
The EPF scheme allows for the transfer of EPF accounts between employers, thereby ensuring continuity of retirement savings for employees who change jobs. EPF transfers can be initiated by the employee or the employer.
When an employee joins a new organization, they are required to provide their EPF account details to the new employer. The new employer then initiates a transfer request to the EPF organization, requesting the transfer of the employee's EPF account from the previous employer to the new employer.
The EPF transfer process can be done either online or offline. Transfers can be completed within a few weeks of the transfer request being initiated. The EPF organization provides an online facility to track the status of the transfer request.
In case of non-compliance, the employer is required to pay a penalty to the EPFO.
In India, 90% of the workforce is employed in the informal sector. A large part of the meagre income of these workers goes into sustenance, medical bills and debts, leaving them with very little savings and emergency funds. Government retirement and insurance scheme such as the EPF provide these workers with a guaranteed source of retirement income and a safety cushion to face personal emergencies and contingencies, reducing financial vulnerabilities and the instances of poverty among the elderly population.
However, the scheme is not accessible to these informal workers, especially those working in households and home-based businesses. With the TankhaPay app, even households and smaller businesses can make retirement and insurance benefits accessible to all their workers and support staff.
Download the app now and help secure the future of all your employees.