(Government Retirement and Insurance Scheme)
Retirement benefits and pensions are necessary for people to maintain their standard of living and quality of life even after they retire. Retirement benefits and pensions provide a regular source of income to people, enabling them to live peacefully and have a financial backup for emergencies.
While the privileged few in formal employment can engage in retirement planning with private instruments such as mutual funds and retirement funds, government retirement and insurance schemes like Employees’ Provident Fund (EPF) are necessary for the rest of the population. In India where 93% of the workforce is in the informal sector, social security benefits such as government retirement and insurance schemes are particularly critical.
What Is the EPF Scheme?
Employees’ Provident Fund (EPF) is a contribution-based, long-term retirement saving and insurance scheme. The scheme ensures that employees have a reliable source of retirement income. In addition to monthly pensions, the employees earn a lump-sum amount and gratuity after retirement. This scheme also includes survivorship benefits including life insurance payout and monthly pensions to widow/widower/dependent children in case of death of a member of EPFO.
The EPF scheme is covered under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The EPF scheme is applicable to the whole territory of India except for Jammu and Kashmir.
The EPFO or Employees' Provident Fund Organisation is a non-constitutional body that manages the EPF scheme. Launched in 1951, the EPFO is governed by the Ministry of Labour and Employment. The various schemes offered by the EPFO cover Indian and international workers and promote employees to save for retirement.
The EPFO offers 3 important schemes:
Employees' Provident Funds Scheme 1952
Employees' Pension Scheme 1995
Employees' Deposit Linked Insurance Scheme 1976
The EPF scheme is applicable to all factories and establishments with 20 or more employees. In some industries notified by the Government, it applies to establishments with less than 20 employees too. While those with 20 or more employees must register mandatorily, those with fewer employees can do so voluntarily.
How Does Contribution Work?
Employees and employers make equal contributions of 12% on the total of basic wage, dearness allowance and retaining allowance. The employers must also make an extra 0.5% contribution towards EDLI and 0.5% towards admin charges, which brings the employer’s contribution to 13%. While a 12% contribution is mandatory for employees, they can choose higher contributions too.
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 employer’s contribution of 12% is split as
8.33% towards the Employees’ Pension Scheme
3.67% towards the EPF scheme
Let us consider an example of an employee who earns Rs. 3500 as basic wage per month.
Employee’s contribution at 12% of Rs. 3500 - Rs. 420
EPS – 8.33% of Rs. 3500 – Rs. 292
EPF – 3.67% of Rs. 3500 – Rs. 128
EDLI – 0.5% of Rs. 3500 – Rs. 17.5
Admin charges – 0.5% of Rs. 3500 – Rs. 17.5
The Benefits Provided by The EPF Scheme
Interest Rate Provided
One of the main benefits provided by the EPF scheme is capital appreciation. The EPF scheme offers tax-free, pre-fixed interest on the deposit held by the EPFO. In addition, rewards are offered to employees at the maturity of the fund. The interest rates are fixed by the government every year based on the revenues earned by EPFO.
Note: The tax savings from EPF are applicable to an upper limit of Rs. 1.5 lakhs of earnings from the scheme.
Every month 8.33% of the employee’s earnings go into the Employees’ Pension Scheme. In the long-run, the amount deposited in the scheme enables the employee to build and maintain a healthy retirement corpus. This corpus provides financial security and independence to employees after their retirement.
In addition to the lump-sum payment on retirement, EPFO members are eligible for monthly pension payments. So, they will have a regular income flow, enabling them to maintain their quality of life.
The contribution of 0.5% of the basic wage made by the employer towards the Employees’ Deposit Linked Insurance (EDLI) Scheme offers life insurance to employees. On the death of an EPFO member (in service), their nominee gets a lump-sum life insurance of up to Rs. 7 lakhs.
In addition, the widow/widower of the deceased EPFO member and each of their children will receive monthly pensions of Rs.1000 each.
Even though full withdrawal is possible only after retirement, EPFO members can make partial withdrawals to meet their personal emergencies. Partial withdrawal up to 75% is possible during service period under any of the following circumstances.
Unemployment period exceeding 2 months
Education or marriage of children
Marriage of self/ daughter/ son/ brother/ sister
Full or partial repayment of housing loan
Home repairs or alterations
Construction or purchase of a house
Medical treatment for self or family members, etc.
Post matriculation education of son/ daughter
How Does EPF Scheme Help Employees and Employers?
Advantages To Employees
The EPF scheme provides a regular source of income, a retirement corpus and emergency corpus to employees post-retirement when they are unable to work. They can live peacefully without having to work and being able to maintain their standard of living. The EPFO members will have a sense of financial security and independence post-retirement.
The survivorship benefits offered to dependents of the EPFO scheme enable them to make ends meet in the event of the death of their breadwinner.
Advantages To Employers
By offering insurance and retirement benefits, the employer can show that they care for their employees and their families. They can help their employees, especially those with lower incomes, to secure their future and build a sense of economic security.
Offering such social security benefits helps build long-term trusting relationships with employees and thereby, improves productivity, output and employee retention. By offering social security benefits, employers can also help attract more skilled employees and retain them.
EPF contributions by both employers and employees are compulsory for all employees earning upto Rs.15000 (basic wage + dearness allowance). When an employee earns more than Rs.15000 per month but is already an EPFO member, the contributions are only for the first Rs.15000. For those who earn higher and are not members of the EPFO, contributions are voluntary.
Do Only Formal Employees Have Access To EPF?
Yes, only formal employees in the organized and unorganized sectors have access to the EPF scheme. Though employers can voluntarily contribute to the scheme, informal employees still don’t have access to the EPF benefits. This is where TankhaPay proves beneficial.
The TankhaPay app enables employers, including households and small businesses, to extend the many benefits of the EPF scheme to their informal employees. This means even someone employing a domestic worker, a driver, few gig workers or temporary workers can make retirement, survivorship and insurance benefits accessible to their employees and their families. By doing so, they can build long-term trusting relationships with their employees and provide them with a sense of financial security post-retirement.
EPF Registration & Compliance
For establishments with 20 or more employees, EPFO registration is compulsory. For those with less than 20 employees, registration is voluntary. However, households cannot register their employees in the EPF scheme. By using the TankhaPay app, it is possible for households to extend all the EPF benefits to their household staff, casual workers and other informal workers.
Further, the registration and compliance processes are time-consuming and complicated. If you have a small office or household enterprise, keeping up with these processes can seem daunting. With the TankhaPay app, you don’t have to worry about these complex registration and compliance processes. The app takes care of everything for you; all you have to do is enroll your employees in the app.
What Is UAN?
UAN or the Universal Account Number is a 12-digit identification number allotted by EPFO to each EPFO member. This number remains constant throughout the service of the employee, even if they shift jobs. The UAN is necessary to:
To check credits and debits
To transfer and withdraw EPF money
To track monthly deposits, etc.
EPF Payment And Withdrawal
The employee’s contribution is debited from their monthly salary and paid towards EPF along with the employer’s contribution.
Full EPF withdrawal is only possible upon retirement or unemployment exceeding two months. Partial withdrawal upto 75% is possible during service period under certain specific circumstances (discussed in the benefits section).
A government retirement and insurance scheme such as the EPF helps reduce financial vulnerabilities and the instances of poverty among the elderly population. Given all the benefits it renders to the employers, every employer should consider registering to the EPF and extending its benefits to their employees, whether or not they are mandated by the law.
With the TankhaPay app, it is super easy for employers, whether they employ one domestic worker or several gig workers, to pay and manage salaries and EPF payments.
Download the TankhaPay app now.