#9 - Employee PROVIDENT FUND Explained | EXAMPLES | BENEFITS | UAN | Save Income Tax | FinCalC [VIDEO]

Employee Provident fund is a government backed Saving scheme applicable to Employees working in an organization. The scheme basically aims at promoting savings to be used post-retirement by various employees all over the country. The employer and employee contribute 12% each of the employee’s salary to the EPF.

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These contributions earn a fixed level of interest set by the EPFO. The amount of interest to be received on the deposit along with the total accumulated amount is totally tax-free, that is, the employee may withdraw the entire fund without worrying about paying any kind of tax on it. Any organization employing a minimum of 20 workers is liable to give EPF benefits to the workers.

Employee’s Contribution towards EPF:
The Employees’ Provident Fund is a fund where both the employer as well as the employee contributes a part of the salary. These contributions are made regularly on a monthly basis. In general, the contribution rate for the employee is fixed at 12%. So every month, 12% of basic salary of employee is contributed towards Employee Provident Fund.

Employers Contribute towards EPF:
The minimum amount of contribution to be made by the employer is set at a rate of 12%. This means that the employer match with the contribution of Employee.

Important points to note about Employee Provident Fund:
The contribution made by the employee goes totally towards the provident fund of the employee.
The contribution made by the employer is divided into different parts.
Total contribution made by the employer is distributed as 8.33% towards Employees’ Pension Scheme and 3.67% towards Employees’ Provident Fund.
Apart from the above-made contributions, an additional 0.5% towards EDLI has to be paid by the employer.
Certain administration costs towards EDLI and EPF standing at the rate of 1.1% and 0.01% respectively also have to be incurred by the employer.
This means that the employer has to contribute a total of 13.61% of the salary towards this scheme.

Interest Rate on EPF:
The interest rate for the financial year 2017 – 2018 was 8.55%. The interest even though calculated on a monthly basis, is transferred to the Employees’ Provident Fund account only on a yearly basis on 31st March of the applicable financial year.If the contribution is not made into an EPF account for thirty-six months continuously, the account becomes dormant or inoperative. Interest is not provided on the amount deposited in inoperative accounts of retired employees. The interest earned on inoperative accounts is taxable as per the member’s slab rate. For contributions made towards the Employees’ Pension Scheme by the employer, the employee shall not receive any interest. However, a pension is paid out of this amount after the age of 58.

Interest Calculation:
The interest rate is announced on a yearly basis, whereas, the interest is calculated on a monthly basis. The interest rate is calculated by dividing the per annum rate by 12. This is done in order to arrive at the amount of interest to be given to the employee for a particular month.
For example :
If the interest rate per annum is set at 12% then the rate of interest for any particular month in the given year will be calculated as 12/12= 1% per month.

Let’s say that an employee started his contributions from the month of November 2017, and his basic salary is rupees 15,000
The applicable rate of interest for him will be 8.55%.
In this case, the rate of interest per month will be 8.55/12=0.7125%.
The employee directs 12% of rupees 15,000 which is equivalent to rupees 1,800 per month towards his EPF account.
This amount is transferred to the employee’s EPF account at the end of every working month and is reflected as a component of the total salary.
The employer makes a contribution of rupees 1,800 which is equivalent to the contribution made by the employee.
3.67% of the employer’s contribution is made towards EPF account which is equal to rupees 550,
Remaining 8.33% of the contribution is made towards the employee’s EPS account.

Hence, The monthly contributions made by the employer and the employee towards Employee Provident Fund is equal to rupees 1800 + rupees 550, which is equal to rupees 2350.

The balance calculation for the next month, December, will be done in the given manner:
Balance carried forward from November 2017= rupees 2,350.
Interest earned for the month of December 2017 = 0.7125 % of 2,350 which is equal to rupees 16.75
Balance at the end of December 2017 = rupees 2,350 + rupees 2,350 = rupees 4,700

Important point to note here is that, Although interest has been earned in December 2017, it is only credited at the end of the financial year on 31st March.

Universal Account Number:
Universal Account Number or UAN is a 12-digit unique number assigned to each and every member who registers with the EPFO. This number is linked with all PF accounts of a member. The member can log in to the EPF member portal using the UAN and access all his PF accounts at one place.
UAN is linked with Aadhaar and PAN of the employee. In case the employee fails to link his Aadhaar and PAN with his UAN, he will not be able to avail almost all the online services offered by the EPF member portal. So it is very important for you to register on the UAN site, in order to keep all PF accounts in one UAN Account.

Benefits of Employee Provident Fund:

• Tax-Free Savings: EPF Scheme provides certain interest on the deposits at a specific rate which is pre-decided by the organisation. Both the amount of interest received on the deposits and the actual deposited amount is deemed to be tax-free by the Indian Government.
• Long-Term Financial Security: Funds deposited in this account cannot be withdrawn easily and hence, helps in ensuring savings.
• Retirement Period: The accumulated fund under this scheme may be used at the time of retirement of the employee. This provides relief to the retired employee in the form of monetary security.
• Unemployment/Income Loss: In case, where the employee loses his/her current job owing to any reason, then these funds may be used to meet expenses.
• Resignation/Quitting of Job: The employee post-resignation is free to withdraw his/her 75% of the EPF fund after one month of the date of having quit the job and remaining 25% after 2 months of unemployment.
• Pension Scheme: The employer not only contributes towards the PF fund but also makes the necessary contributions towards the employee’s pension which can be later used by the employee post-retirement.
• Accessible All Over: With the help of the Universal Account Number (UAN), employees can easily get access to their PF account via the EPF member portal. They can transfer their accounts whenever they make a shift in their current jobs.

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