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IN Tax 2024

iCalculator™ IN: Employees Provident Fund

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Employee's Provident Fund (EPF) is a savings option available exclusively for salaried employees. The aim of EPF is to build a retirement fund for salaried employees.

Employee's Provident Fund in Detail

If you are a salaried individual, every month 12 per cent of your basic pay is deducted for contribution towards EPF. The percentage of deduction is set by the government, and it is fixed for everyone, irrespective of their salary.

Example 1: Let's say your basic salary is ₹10,000 per month. Every month, you will have to contribute 12 per cent or ₹1,200 towards EPF.

Employer's contribution to EPF

In addition to your contribution, your employer has to contribute 12 per cent or ₹1,200 towards your provident fund. However, out of this 12 per cent only 3.67 per cent of your employer's contribution is invested into your EPF. Rest of the contribution goes towards Employees' Pension Scheme (8.33 per cent), Employees Deposit Linked Insurance or EDLIS (0.5 per cent), EPF administrative charges (1.1 per cent), and EDLIS administrative charges (0.01 per cent).

Example 2: Continuing with the above example, in addition to your ₹1,200, your employer will also contribute 12 per cent of ₹1,200 into your EPF account. This amount will be distributed among EPF, EPS, EDLIS and the administrative charges as per percentages mentioned above.

Where is the EPF money invested?

EPF money is managed by the Employee's Provident Fund Organization (EPFO), which is a part of the labour ministry. All the money is invested in fixed-income instruments like government bonds, bonds of public sector companies, fixed deposits with public sector banks, etc. EPF money cannot be invested in equities.

What is the rate of interest for EPF?

For 2014-15, EPF is offering an interest rate of 8.75 percent.

Withdrawal of EPF

You can withdraw EPF money either upon retirement or when you leave an organization. If you are continuing with an organization for more than five years, you can withdraw some money from your EPF account for special reasons. Some permissible reasons for EPF withdrawals are purchase of flat/residential plot, repayment of a loan taken from government institutions, treatment of a family member, etc.

Portability of EPF

Under a new rule announced on 16th October, 2014, EPF accounts are now portable through the Universal Account Number (UAN). The UAN is a unique EPF number for every individual. An individual's UAN number is valid for the lifetime.

Earlier, employees had to get a new EPF number every time they changed their employers. Also, the process of transferring EPF from one employer to another was very cumbersome, which discouraged people from transferring their EPF funds. This led to a lot of withdrawals and didn't allow EPF serve its true purpose of a retirement fund. With the UAN, you can continue your EPF account even if you change employers, and thus maintain your balance for longer durations.

Tax benefits of EPF:

Both the employee's and employer's EPF contribution are exempted from tax. However, employees can claim only their contribution towards EPF for tax deduction, subject to an upper limit of ₹150,000, and not the employer's contribution. For example, if you contribute ₹25,000 towards EPF (your own contribution of 12 per cent), you can deduct this amount from your taxable income and get tax savings. You can also make voluntary contributions to EPF over and above the 12 per cent to get additional tax savings.

Any interest earned on EPF is also tax free. However, if you withdraw money before 5 years, you will have to pay tax on all the three components – your contribution, your employer's contribution and the accumulated interest. Any withdrawals after 5 years are fully exempted from tax.

Use iCalculators India tax calculator to see how EPF contributions impact your tax payable.

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