Employee Provident Fund

Employee provident scheme (EPF) and its applicability

The Employee Provident Fund (EPF) scheme, overseen by the Employee Provident Fund Organization (EPFO), serves as a vital retirement benefits program. For organizations employing a minimum of 20 staff members, EPF registration becomes mandatory and must be secured within one month of reaching this employee threshold. However, businesses with fewer than 20 employees can voluntarily opt for EPF registration, granting all their employees' eligibility for EPF benefits right from the commencement of their employment.

Employees are required to contribute 12 percent of the basic salary and dearness allowance (DA) to the EPF scheme every month. Employers split contributions between the EPF (3.67 percent) and the Employee Pension Scheme (8.33 percent). These contributions are calculated based on a maximum wage ceiling of INR 15,000 per month. It's important to note that employees have the option to contribute at a higher rate, although in such cases, the employer is not obligated to match the increased contribution. Should an employee wish to contribute based on a higher wage, a joint request from both the employee and employer is necessary. Additionally, in such scenarios, the employer must cover administrative charges on the excess wages, i.e., wages surpassing the INR 15,000 per month limit.

As of March 2023, the EPF interest rate stands at 8.15 percent per annum.

Benefits of EPF

The Employees' Provident Fund (EPF) provides several benefits to its members:

• Fixed Interest Rate: EPF offers a fixed interest rate, currently at 8.15 percent per annum. Even when the fund is dormant, it continues to earn interest.
• Emergency Corpus: EPF serves as an emergency fund due to specific premature withdrawal rules. In times of financial need, members can withdraw funds for essential purposes.
• Retirement Benefit: Primarily, EPF serves as a retirement benefit, providing members with a sense of financial security during their post-employment years. It helps individuals build a corpus for retirement, ensuring financial stability in old age.
• Tax Benefits: EPF contributions come under Section 80C of the Indian Income-tax Act, 1961. This provides tax deduction benefits under certain conditions, and the earnings from EPF are tax exempt, offering additional financial advantages to members.

Key aspects of the EPFO

The EPFO was established under the Employee Provident Fund and Miscellaneous Provision Act of 1952, a legislation enacted by the Indian Parliament. This initiative aimed at providing social security to the workforce in India. Administered by the Ministry of Labour and Employment, Government of India, the EPFO has emerged as one of the largest social security organizations worldwide in terms of its customer base and financial operations. Its inception dates back to March 4, 1952, and its headquarters are situated in New Delhi.

The EPFO operates as a statutory body, entrusted with the responsibility of regulating and managing provident funds in India. Its fundamental objective is to extend a social security program to Indian workers. Initially serving a modest number of beneficiaries, the organization has remarkably expanded its reach, now catering to approximately 45 million employees employed across around 0.6 million contributing firms.

On the global scale, the EPFO ranks as the 21st largest pension fund, providing support to about 6.3 million retirees, highlighting its significant impact and contribution to the welfare of the workforce and retirees in India.

Schemes of EPFO

EPFO offers three schemes:

• Employees' Provident Funds Scheme 1952 (EPF)
• Employees' Pension Scheme 1995 (EPS)
• Employees' Deposit Linked Insurance Scheme 1976 (EDLI)

Employees' pension scheme 1995 (EPS)

EPS contribution and eligibility:

• Out of the employer contribution to the Provident Fund, 8.33 percent is allocated to the Employee Pension Scheme.
• The EPFO assigns a unique Universal Account Number (UAN) to insured members. This UAN allows them to access online records of their EPF and EPS contributions, transaction history and the portion of contribution deducted from their salary throughout their employment.

EPS pension benefit eligibility:

• Insured members become eligible for EPS pension benefits when they reach the age of 58 and have completed at least 10 years of service.

EPS wages and government contribution:

• EPS wages consist of an 8.33 percent contribution from employers and the central government share of 1.16 percent of wages not exceeding a threshold limit of INR 15,000. The central government raised this wages limit from INR 6,500 to INR 15,000 in September 2014.

EPS for high-earning employees:

• For employees earning more than INR 15,000 per month, only the employer's EPS contribution is directly deposited into their EPF account.
• Employees earning above INR 15,000 per month can still receive pension benefits if they were previously members of EPS.

EPS eligibility for older employees:

• Employees above 50 years of age who cannot fulfill the mandatory 10-year service requirement before retirement at 58 can qualify for EPS if they haven't joined another pension scheme. EPS is not applicable to individuals receiving reduced pension and re-joining as employees.

Pension distribution upon member's demise under EPS:

• If case where insured members pass away before reaching 58 years of age and have not completed 10 years of eligible service, the pension amount is transferred to either the widow or the children.
• Widow receive 75 percent of the pension amount, while each child (up to two children) is entitled to 25 percent of the pension amount until they reach the age of 25.

Employees' deposit linked insurance scheme 1976 (EDLI)

The Employees' Deposit Linked Insurance Scheme (EDLI) is an insurance cover provided by the Employees' Provident Fund Organization (EPFO) for private sector salaried employees who are members of EPFO. Established in 1976, this scheme offers lump-sum payment to the registered nominee in the unfortunate event of the insured employee's death during their service tenure.

Coverage and objective:

• The EDLI scheme extends its coverage to all organisations registered under the Employees Provident Fund and Miscellaneous Provisions Act, 1952, which are required to subscribe to this scheme to provide life insurance benefits to their employees.
• This scheme works in combination with EPF (Employee Provident Fund) and EPS (Employee Pension Scheme).
• The primary objective of EDLI is to provide financial assistance to the family members of EPFO members in the event of the employee's demise. Importantly, there are no exclusions under this scheme, ensuring that all employees are covered.

Eligibility and benefit calculation:

• EDLI applies to all employees with a basic salary under INR 15,000 per month. If the basic salary goes above INR 15,000 per month, the maximum benefit is capped at INR 6,00,000, which was increased to INR 7,00,000 effective from April 28, 2021.
• Employees do not need to make any direct contributions to EDLI, their contributions are required only for EPF.
• A bonus of INR 0.15 million available under the EDLI scheme, which was raised to INR 0.25 Million as of April 28, 2021.

Employer's contribution:

• Employers with more than 20 employees must register for EPF, automatically making their employees eligible for the EDLI scheme.
• While employers can opt for other group insurance schemes, the benefits offered must be equal to or greater than those provided under EDLI.
• According to EDLI provisions, the employer's contribution is 0.5 percent of the basic salary or a maximum of INR 75 per employee per month. If no other group insurance scheme is in place, the maximum contribution is capped at INR 15,000 per month.
• For calculation purposes, the dearness allowance is added to the basic salary.

Benefits of the EDLI scheme

• The EDLI scheme offers free insurance coverage to the family members of an employee in the event of their death during active service.
• The employer's contribution to EDLI is modest, yet the benefits provided are substantial, offering crucial financial support to the deceased employee's family.
• There are no exclusions in the EDLI scheme, ensuring that all employees, regardless of their position or salary, are covered.
• The scheme provides death benefit even if the employee passes away in a foreign country.
• EDLI scheme is a welfare measure supported by both employers and the government; guaranteeing life insurance benefits.
• To enhance employees' morale by providing insurance coverage and ensuring financial security their families after their demise.

Family members and scheme portability:

• The primary objective of the EDLI scheme is to provide financial security to the family members of the deceased policyholder, including the spouse, unmarried daughter, or male child up to 25 years of age.
• Employees cannot choose between EPF, EPS, or EDLI schemes, but these schemes are transferable with changes in employment. The new employer continues payments in the existing account only.

Contribution by the employee and employer to the EPF, EPS, and EDLI

Employer contributions are made to these schemes on behalf of the employees. Employee contributions are deducted from the salary before it is credited. Employees do not need not make direct payments to these schemes.

The contribution of employees is calculated as:

• For EPF: 12 percent
• For EPS: none
• For EDLI: none

The contribution of Employer is calculated as:

• For EPF: 3.67 percent
• For EPS: 8.33 percent or INR 1,250
• For EDLI: 0.50 percent or maximum INR 75

Under Section 17 (2A) of the Employees' Provident Fund and Miscellaneous Provisions Act 1952, an employer can cease contributing to the EDLI scheme if they opt for a superior employee insurance policy under a different scheme.