What is EPF (Employee’s Provident Fund)
Before understanding benefit of having an EPF account, let us have a quick introduction on what is EPF and how it is calculated.
Employee’s Provident Fund (EPF) is a retirement saving scheme managed by the EPFO (Employee’s Pension Fund Organization). The main goal of the EPF is to give workers the stability and financial security after they retire from their services 1.
It has been made mandatory for every company to now open an EPF account for their all employees.
Finally, this EPF is a corpus made by the monthly contribution from employee and the employer in the PF (Provident Fund) account. The amount of months contribution is based on the basic salary of the employee.
Employees working in establishments covered by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
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Calculating the EPF component
EPF is calculated on the basic salary of the employee. EPF is calculated by taking 12% of the basic salary.
Firstly, one portion of the 12% of basic salary is taken from the employee’s total salary share.
While, the second 12% of the basic salary is contributed by the company on behalf of the employee.
This 12% of company’s portion is further bifurcated into two parts:
- First 3.67% goes into your EPF (Employee’s Provident Fund) account
- Next 8.33% goes into your EPS (Employee’s Pension Scheme) account
For example, if an employee earns Rs. 15,000/- as a basic salary, then 12% of Rs. 15,000/- i.e., Rs. 1,800/- will be contributed by the employee in their EPF.
From the 12% of Rs. 15,000/- i.e., Rs. 1800/- company’s contribution of Rs. 553/- (3.67% of Rs. 15,000/-) will go into EPF and Rs. 1250/- (8.33% of Rs. 15,000/-) will go into EPS.
Therefore, summing up the above example, an employee of Rs. 15,000/- as basic salary will have a monthly EPF contribution of Rs. 2350/- (Rs. 1800 + Rs. 553/-) and EPS contribution of Rs. 1250/-.
Here are 4 benefit of having an EPF account
High interest rate
An EPF account provides a higher interest, which is in the range of 8 – 9% per annum. This interest rate is higher or at par in comparison to the FD and other low risk investment alternatives.
| Investment Type | Average Annual Return (for the last 15 years) | Level of Risk |
| Stock Market | 10 – 12% | Very High |
| Mutual Funds | 8 – 10% | High |
| Gold | 7 – 10% | Moderate |
| Fixed Deposit | 4 – 5% | Low |
| Saving account | less than 4% | Very Low |
From the above table it is evident that, an 8 – 9% return on investment for a low level of risk is a lucrative option to opt for having a EPF account.
Therefore, the main benefit of having an EPF account is the higher interest rate. An EPF provides an interest of 8 – 9%, which can provide phenomenal returns from the effect of compounding.
Tax free returns – EEE category
The returns gained from the EPF are exempt from all taxes. There is no tax on capital gain, principal amount or the interest gained from the corpus (EEE category).
As the EPF corpus, with the interest gained is completely tax free, the entire sum can be used by the employee in retirement planning, generating pension or taking a lump sum from the EPF corpus.
Thus, this exemption of tax is an added advantage over the other investment alternatives, like mutual funds or stocks.
Low risk on investment
As the EPS is backed by a Government organisation, there is no direct threat of risk involved on the investment.
The EPF accounts are managed by experts and backed by insurances which makes low risk for an EPF to default.
Thus, one can invest in an EPF in a carefree manner as the Government wants their citizens to live with a risk free retirement.
Added insurance
The EPF has a component of insurance over the employee, wherein in the case of fatality of the employee at the time of service, the family will get the corpus, plus an added fixed lump sum as a part of the insurance.
The EPF also provides for a family pension, which is payable to the spouse or dependent children in case of the employee’s death before or after retirement.
Conclusion
It’s crucial to verify the most recent laws and regulations pertaining to the EPF and EPS because the Government may alter and amend the plan.
Moreover, from the benefits mentioned above, having an EPF account ensures that the employee will be financially free at the time of retirement.
It should be noted that an employee must have completed at least 10 years of qualifying service in order to be eligible for a pension. Employees who leave their jobs before accumulating 10 years of service may withdraw their EPF contributions but will not be eligible for a monthly pension.
In conclusion, having a consistent EPF will naturally take care of your retirement saving without much of a worry.
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