epf-act

Dr. Ravi Shekhar Vishal [Source: http://www.bemoneyaware.com/blog/epf/]

Employee Provident Fund (EPF)

Employee Provident Fund (EPF) is one of the main platforms of savings in India for nearly all

people working in Government, Public or Private sector Organizations. This article is about what

is Employee Provident Fund (EPF), Employee Pension Scheme (EPS), Employees Deposit

Linked Insurance Scheme (EDLIS), how the contributions are calculated based on basic salary

and dearness allowance, what are the EPF interest rate, how much would one save in EPF, how

would one know about the amount accumulated in PF.

What is Employee Provident Fund?

A provident fund is created with a purpose of providing financial security and stability to elderly

people. Generally one contributes in these funds when one starts as employee, the contributions

are made on a regular basis (monthly in most cases). Its purpose is to help employees save a

fraction of their salary every month, to be used in an event that the employee is temporarily or no

longer fit to work or at retirement. The investments made by a number of people / employees are

pooled together and invested by a trust.

Employee Provident Fund (EPF) is implemented by the Employees Provident Fund

Organisation (EPFO) of India. An establishment with 20 or more workers working in any one of

the 180+ industries should register with EPFO. Typically 12% of the Basic, DA, and cash value

of food allowances have to be contributed to the EPF account. EPFO is a statutory body of the

Indian Government under Labour and Employment Ministry. It is one of the largest social

security organisations in the world in terms of members and volume of financial transactions

undertaken.

EPF, EPS, EDLIS

The Constitution of India under “Directive Principles of State Policy” provides that the State

shall within the limits of its economic capacity make effective provision for securing the right to

work, to education and to public assistance in cases of unemployment, old-age, sickness &

disablement and undeserved want.

The EPF & MP Act, 1952 was enacted by Parliament and came into force with effect from 4th

March, 1952. A series of legislative interventions were made in this direction, including the

Employees’ Provident Funds & Miscellaneous Provisions Act, 1952. Presently, the following

three schemes are in operation under the Acts : ( Click on the link if interested in reading the acts

which are in pdf format)

1. Employees’ Provident Fund Scheme, (EPS)1952

2. Employees’ Deposit Linked Insurance Scheme,(EDILS) 1976

3. Employees’ Pension Scheme, 1995 (replacing the Employees’ Family Pension Scheme,

1971)(EPS)


Employees’ Pension Scheme (EPS) of 1995 offers pension on disablement, widow pension,

and pension for nominees. EPS program replaced the Family Pension Scheme (FPS). It is

financed by diverting 8.33 percent of employer’s monthly contribution from the EPF (restricted

to 8.33% of 6500 or Rs 541) and government’s contribution of 1.17 percent of the worker’s

monthly wages.

The purpose of the scheme is to provide for

1) Superannuation Pension: Member who has rendered eligible service of 20 years and retires

on attaining the age of 58 years.

2) Retiring Pension: Member who has rendered eligible service of 20 years and retires or

otherwise ceases to be in employment before attaining the age of 58 years.

3) Permanent Total Disablement Pension

4) Short service Pension: Member has to render eligible service of 10 years and more but less

than 20 years.

Employees Deposit Linked Insurance Scheme (EDLIS)

Under the EDLI scheme life insurance cover is provided to the PF members. The cost of the

scheme is borne by the employer but as the amount of life coverage under this statutory scheme

is very low (a maximum amount of Rs. 60,000), usually employers opt out of the EDLI scheme

by going for group insurance scheme which usually provides higher coverage to employees

without any increase in cost to the employer.

EPF, EPS and EDLIS are calculated on Basic salary, Dearness allowances(DA), cash value of

food concession and retaining allowances if any. Most of the organizations follow Basic+ DA

Method.

Retaining allowances means an allowance payable for the time being to an employee of any

factory or other establishment during any period in which the establishment is not working, for

retaining his services.

Table below gives the rates of contribution of EPF, EPS, EDLI, Admin charges in India.

Scheme Name Employee contribution Employer contribution

Employee provident fund 12% 3.67%

Employees’ Pension scheme 0 8.33%

Employees Deposit linked insurance 0 0.5%

EPF Administrative charges 0 1.1%

EDLIS Administrative charges 0 0.01%


In industries like beedi, jute, guar gum factories, coir industry (other than spinning sector) the

Employee contribution is 10% while employer’s contribution is 1.67%.

Employees drawing basic salary upto Rs 6500/- have to compulsory contribute to the Provident

fund and employees drawing above Rs 6501/- have an option to become member of the

Provident Fund. It is beneficial for employees who draw salary above Rs 6501/- to become

member of Provident Fund as it is deducted from the salary before it is deposited on bank or

given hence compulsorily saving happens. Employee’s contribution is matched by

Employer’s contribution (till 12%) so extra money and it is helpful for tax purpose too. The

employer contribution is exempt from tax and employee’s contribution is taxable but

eligible for deduction under section 80C of Income tax Act.

Calculation of Employees Provident Fund Contributions

Basic salary of Rs 3500/-

Let us calculate the contribution of an employee who is getting a basic salary of Rs 3500.

Contribution Towards Calculation Amount

EPF Employees share 3500 x 12% 420

EPS Employer share 3500 x 8.33% 292

EPF employer share 3500 x 3.67% 128

EDLI charges 3500 x 0.5% 18

EPF Admin charges 3500 x 1.1% 39

EDLI Admin charges 3500 x 0.01% 0.35 ( round up to Rs 1/-)

Basic salary above Rs 6500/-

In such cases companies uses different method for calculation as per their pay roll

policy. Consider an employee getting a basic salary of 7500/- We can calculate it in different

ways but EPS is calculated only up to 6500/- that means the maximum amount is fixed to Rs

541.00. The three methods mentioned below are based on the above example.

Method-1

If company consider total basic salary above the limit fixed 6500/- for PF calculation. Employer

has decided to contribute on total basic salary which is 12 % on 7500.00 equal to 900.00. EPS

Share is fixed to 541. Balance (900-541) goes to EPF account 359.00. You may be thinking that,

what about 3.67%? Here you don’t need to care about it.





EPF employer share 7500 x 12% (-) 541 359



EDLI Admin charges 7500 x 0.01% 0.75 ( Round up to Rs 1/-)

Method -2

Some companies follows the below method in which employee share is calculated on 7500/- and

employer share is calculated on up limit Rs 6500/-








Method-3

Some companies calculate both employer and employee shares on 6500/- in spite of higher basic

salary than 6500.00








EPF scheme allows partial withdrawals for the purpose of marriage/illness/higher

education/house construction etc.

epf-act

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