PF Scheme – It’s Features & Benefits

As a worker who is working in a company set-up there are many things that one would really like to understand about the employee Provident Fund (EPF). This blog makes an attempt to discuss the benefits and edges of worker Provident fund Scheme as a set Savings instrument in terms of relevance, Contributions, Return, Risks and highlights the recent relief measures that the govt. has proclaimed considering the present Covid-19 pandemic.

 

Applicability

 

It covers each institution within which twenty or more persons are employed and certain organizations are covered, subject to certain conditions and exemptions even if they employ less than twenty persons each. According to the principles in EPF, an employee whose ‘pay’ is over Rs 15,000 a month at the time of joining, is not eligible and is termed non-eligible worker. Staff drawing however Rs 15,000 per month ought to compulsorily become members of the EPF scheme. However, an employee who is drawing a ‘pay’ higher than the prescribed limit (currently Rs 15,000) will become a member if he and his employer agree.

 

Contribution Amount

 

For Salaried people, the monthly contribution towards the Employee’s Provident Fund (EPF) remains the sole forced savings mechanism. Every month 12% of the (Basic salary+ Dearness Allowance) along with a matching contribution by the employer flows into the EPF account. For an employee drawing more than Rs 15,000 per month, it would mean that an employee can opt for a maximum deduction of Rs 1,800 (12% of Rs 15,000) instead of 12% of the (Basic salary+ Dearness Allowance). From the employer’s contribution, 8.33% goes into a pension vehicle—the Employee’s Pension Scheme (EPS) but it is calculated on Rs 15,000 a month and 3.67% towards the EPF. So for each worker with basic pay equal to Rs 15,000 or a lot of, the diversion is Rs 1,250 every month into EPS. If the basic pay is a smaller amount than Rs 15000 per month, then 8.33% of that full quantity can move into EPS. Additionally, the employer conjointly pays zero.5% of Basic remuneration towards Employee’s Deposit linked Insurance scheme (EDLI) or a max of Rs 75/- per worker per month, 0.01% towards EDLI handling Charges and zero.65% towards EPF administrative Charges. Employees Deposit Linked Insurance Scheme (EDLI) is an insurance cover provided by the EPFO (Employees Provident Fund Organisation) for private sector salaried employees. The registered nominee receives a lump-sum payment within the event of the death of the person insured, throughout the period of the service. The maximum pay-out that the nominee receives under EDLI is capped at Rs six Lakhs.

 

COVID-19

 

Due to the COVID-19 pandemic, Government of India has provided the following relaxations:

• The EPF contributions for May, June, and July have been reduced to 10% instead of 12% for Non-government organizations.
• Under the Pradhan Mantri Garib Kalyan Yojana, ( PMGKY) Government of India will pay the employer and employee contribution to EPF account of employees from March to June 2020 (Now extended up to August 2020) for establishments with up to 100 employees and where 90% of those employees draw a salary of less than Rs 15,000 per month. The Government has provided liquidity support of Rs 2,500 Crores for the same .The intention of this change seems to be to ensure liquidity support to the businesses and to safeguard the employment and its continuity for lower-paid employees during the COVID-19 crisis period.

Voluntary Provident Fund (VPF) Contributions

 

The VPF is an extension of the EPF that permits the subscriber to take a position on the far side the 12% threshold whereas providing identical tax benefits and return. Whereas the PPF carries an investment limit of Rs 1.5 lakh each year, there's no such restriction on VPF. Besides, in contrast to PPF returns that fluctuate in line with 10-year government bonds yield, the interest rate on VPF is that the same as that of the EPF.

Though hiking the PF Contribution would mean lesser net take-home pay, it would be suitable for those employees who are closer to retirement and those who are in the higher-income earning bracket since it fetches a higher return than other fixed return instruments providing for more financial stability later. Young savers would be better off opting for a higher equity component through the NPS or equity funds rather than enhancing their debt allocation through VPF.

 

Returns

 

EPF is currently offering an interest rate of 8.5% for Financial Year 2019-20 which is higher than fixed return tax saving investment instruments like PPF and National Savings Certificate which presently are offering a return of 7.1% (7.9% up to FY 2019-20) and 6.8% respectively. The rates of return are the highest in the current scenario with the highest safety as compared to even the Debt mutual funds. Interest is credited to the member’s account on the Monthly running balances.

 

Risks

 

EPF is a government-backed retirement savings scheme that offers a guaranteed risk- free rate of return

Lock-in Period

 

EPF is locked in Up to retirement except for special circumstances as covered below where they can be withdrawn prematurely.

 

Liquidity

 

The subscribers can have access to their EPF account at the time of retirement from a company or their nominees receive an equivalent within the event of their untimely death. According to the EPF Act, for claiming the ultimate PF settlement, one should retire from service after attaining fifty five years of age. The full EPF balance includes the employee’s contribution and that of the employer, in conjunction with the increased interest. There is, however, a window to partly withdraw the amount for those nearing retirement. Anyone over fifty four will withdraw up to 90 % of the accumulated balance with interest.

 

Scenarios of Premature withdrawal

 

The money in the EPF account is withdrawn prematurely as a non- refundable advance before the retirement of the subsequent conditions are fulfilled:

1. With effect from December 6, 2018, the employees can withdraw 75% of their PF money after remaining unemployed for 1 month and balance 25% after he is out of employment for 60 straight days or more. Prior to this, an employee could make such withdrawal only after remaining unemployed for more than 60 days.
2. 50% of the employee’s share of the PF money can be withdrawn for the marriage of self, Siblings, or children if the EPF account has been maintained for at least 7 years.
3. 50% of the employee’s share of the PF money can be withdrawn for Education of self or children after Class 10 if the EPF account has been maintained for at least 7 years.
4. 90% of the PF money (Both employer and employee’s share) can be withdrawn by the subscriber for Home Loan repayment if the EPF account is at least 10 years old
5. Up to a maximum of 24 times of Monthly Basic Salary + DA for Purchase of a Plot and up to 36 times of Monthly Basic Salary + DA for construction of a House subject to the balances in the EPF can be withdrawn if the EPF account is at least 5 years old.
6. Up to a maximum of 6 months of Monthly Basic Salary + DA or employee’s contribution + Accrued interest whichever is lower for a medical emergency of self or family member without any service period requirement.

Final Settlement Process: To withdraw money, the employee may now use ‘Universal Account Number’ (UAN) based Form 19’ and in effect bypass the employer signature requirement. This facility will be available to all those subscribers whose Universal Account Number (UAN) is activated and seeded with the KYC details like bank account and Aadhaar number. The claim can be submitted online on the Member e-Sewa portal.

Advance Availment Process: If an employee has to Know Your Customer (KYC) compliant Universal Account Number (UAN), which is activated and seeded to his bank account, he does not have to go through his employer to get hold of his EPF. The UAN Based Form 31 (New) can be directly submitted to the EPFO. Else, he may fill in Form 31 and submit it to the EPFO through his employer. The claim can be submitted online on the Member e-Sewa portal, provided Aadhaar is linked to UAN.

COVID-19 pandemic rule: The subscriber can withdraw up to 75% of the Provident Fund Balance (Employee’s Share & Employer’s Share) or 3 months Basic Salary& Dearness Allowance, whichever is lower. Online Claims under COVID-19 are being processed under auto mode within 72 hours by EPFO. The EPFO sends a cheque to the Bank within 1-3 days to deposit the same within the Bank account. It means that the subscriber can get the PF money in his Bank account within a maximum period of 5 days from the date of claims submission.

Tax Benefits

 

Employee Provident Fund enjoys an Exempt-Exempt-Exempt Tax status. The employee contribution is eligible for tax benefits under Section 80C to the extent of Rs 1.5 Lakhs. The interest attained and cash received on superannuation is also tax-free.

The government had introduced Tax deducted at source (TDS) on PF withdrawals so as to discourage premature withdrawals and promote long-term savings TDS @ 10% are subtracted from the withdrawal amount subject to a financial limit of Rs 50,000 if the withdrawal happens before finishing five years of subscription if PAN Card is submitted. The subscriber also will be required to forego all the tax concessions availed by him within the past regarding contributions to such recognized PF if the withdrawal happens before five years. For calculating the amount of five years, it's not necessary that the service ought to be continued with the same employer. Previous period employment is also thought of for the same.

Budget 2020 has introduced a new tax regime of simplified tax computations and tax rates by eliminating seventy of the a hundred tax exemptions and deductions or to continue with the old regime with the older tax slabs and holding all the tax exemptions and deductions. The deduction under Section 80C would solely be offered solely under the old Tax regime. Also, the employer’s contribution exceeding Rs 7.5 lakh in a financial year to retirement funds like employees Provident Fund (EPF), National Pension System (NPS), or the other pension fund is planned to be created taxable within the hands of the worker. this may impact the higher basic pay earners negatively.

 

Other Benefits of EPF

 

Post-retirement, the worker would be eligible for a pension. With worker Deposit linked Insurance the subscriber is additionally coated under the organization’s insurance scheme.

It may be discovered that the worker Provident Fund as a hard and fast savings instrument has evolved to fulfill the necessities of building a retirement corpus for retirees, higher Liquidity in times of emergency for those still working and better returns compared to alternative fixed Savings instruments.