Employee Provident Fund or EPF has been a trusted savings option for the salaried class in India for ages. It is one of the most common forced savings schemes, where the employer deducts 12% of the basic salary, plus dearness allowance and makes an equal contribution to your provident fund account. There is a possibility that in the near future, special allowances may be included in the calculation of the EPF contribution, meaning a larger share of your salary would go towards your provident fund according to a Supreme Court ruling. Variable allowances will not be taken into account. However, this rule will not be applicable to those who have a basic salary and dearness allowance more than Rs.15,000 per month.
Let us try and understand the impact of the changes in EPF Rules.
The Supreme Court ruling will not affect those employees who have basic wages and dearness allowance more than Rs .15,000 per month as employers of such workers are exempted from making contributions to EPF. Employees who have been voluntarily deducting PF contributions will not be impacted.
By definition, HRA does not come under 'basic wages' according to Section 2(b) of the EPF Act, 1952 and is not affected by the ruling. Earning less than Rs. 15,000/-
Employees in the monthly salary bracket of less than Rs. 15,000/- per month may have to contribute a larger portion of their CTC as special allowance would be included, but conditions apply here as well.
There may be higher deductions in case of international workers with regard to PF contribution. The limit of Rs. 15,000 does not apply to them.
Though interest rates on small savings have been slashed across the board, the reduction is lower than that of other small savings schemes like PPF where the rates have come down from 8 % to 7.9 % for the latest quarter. The current interest rate being offered by EPF is 8.65%, though it is the lowest rate in a five year period.
Some employees are tempted to withdraw their employee provident fund every time they change jobs, but this is not advisable as withdrawal from employee provident fund before completion of five years will attract tax deducted at source.
Given the fact that EPF is one of the few investment options where investment, interest, and withdrawal are exempt from tax, you should not withdraw your EPF balance when you change jobs.
The major change which has benefited EPF subscribers across India has been the introduction of the Universal Account Number (UAN). Existing EPF account holders who have their previous EPF balances held under different EPF accounts will be merged into one account. This is a welcomed initiative as many subscribers faced difficulty while transferring their EPF balance and keeping track of their status. Withdrawing the EPF balance, as mentioned earlier, is not a prudent decision as there will be tax deducted at source.
Apart from this, there are various facilities online like checking your EPF balance online, updating your KYC information, printing, or downloading your UAN card or getting a printout of your updated passbook.
You no longer have to bother about opening a new PF account every time you change a job. All you need to do is provide your UAN number, and the previous balance in your EPF account will be transferred here.
A significant departure from earlier norms, the Employee Provident Fund Organization (EPFO) has recently been investing in the stock markets to provide better returns for its subscribers.
Earlier, the EPFO invested only in fixed income instruments, but for the last four years, 5% of the incremental contributions to the EPFO have been invested in equity Exchange Traded Funds (ETFs) which has been raised to 18% in 2018.
There are proposals to allow EPF subscribers the liberty to manage part of their equity contributions. The subscribers, however, cannot choose the investment type.
Aggressive subscribers stand to gain from this proposed change.
The government plans to limit the allowances component for employees to 50% of the basic salary. At present, employers intentionally keep the basic salary low so that their contribution towards government regulated social security benefits are minimum, and they are able to save on costs.
Post-modification of the rules, special allowances will be included for calculation of the employee contribution towards PF where the employee is earning below Rs. 15,000 per month, resulting in a higher contribution for both employer and employee. The percentage of contribution at 12%, for both employer and employee, will remain the same.
The impact of this is that the take-home salary of the employee will be less, but savings towards retirement will be more. This will lead to a more comfortable retirement.
Employees who earn at least Rs. 15,000 per month under the current regulations are entitled to a minimum guaranteed pension of Rs. 1000 after they retire for life. This pension is payable provided the employee has regularly contributed to the EPS without any break for a period of 10 years.
Of the 12% that you contribute, the entire amount goes towards EPF. As far as the 12% contributed by the employer is concerned, 8.33% goes towards EPS and 3.67% towards EPF.
The rules for withdrawal earlier when an employee remained unemployed for more than two months was that they could go for full and final settlement after the two month period.
Under the current rules, you are allowed to withdraw 75% of your EPF balance within a month of losing the job. The balance 25% can be withdrawn if you remain unemployed even after two months.
Withdrawal from your EPF adversely affects your retirement goals, so it is not advisable.
Can I increase my EPF contribution?
Yes, you can increase your contribution to EPF through the Voluntary Provident fund or VPF. The interest earned on VPF balance is the same as EPF, and it is tax-free as well. As a major portion of the VPF will be invested in debt options, making it a risk-free option. While there is an upper ceiling in case of PPF of Rs. 1.8 lakhs, there is no such ceiling for VPF. Like EPF, the advantage for employees is that VPF also takes place through salary deductions. You also have the option of stopping, increasing, or decreasing the contribution to VPF twice a year.
However, there are withdrawal restrictions and can only be made at retirement. Apart from that, it is not a wise option for young employees as the returns from debt in the long term are low.
How is EPF pension calculated?
Both the employer and the employee contribute 12% of the employee's basic and DA, but only 8.37 % of the total contribution goes to the Employee Pension Scheme or EPS. There is, however, a ceiling of Rs. 15,000 regarding the EPS contribution from the employer. As per a recent Supreme Court ruling, this has been scrapped and the employee will get a pension according to the last drawn salary. EPF pension is calculated in the following way. Monthly Pension = Number of years of service multiplied by last drawn salary divided by 70, with the earlier ceiling of Rs. 15,000, the pension was very low. Under current rules, irrespective of the last drawn salary (being greater than Rs. 15,000/month), the pension would be, Rs.15,000 x 20 (years of service)/70 or Rs. 4285. With the Supreme Court ruling, if the last drawn basic salary of the employee on retirement is Rs. 61,159 based on a 10 % annual hike over 10 years, the pension would be, Rs. 61,159 x 20/70 or Rs. 17,474 per month.
Can I withdraw pension contribution in PF?
The amount you will be entitled to withdraw from the pension contribution will depend on the number of years of service. If you withdraw PF and EPS balance before completion of ten years of service, then you will get both EPF and EPS balance.
Where the number of years of service is more than ten years, you cannot withdraw the EPS balance. You will get a reduced pension if you opt for the payout age of 50 or a regular pension at age 58. Post the age of 50 and completion of ten years of service, you are entitled to reduced pension. When you turn 58, you are eligible for a full pension.
If you are employed, keep transferring your PF balance till you retire. If you decide, however, to quit service and start your own business, you should transfer the balance in your EPF to the National Pension Scheme.
What is the maximum pension in EPF?
Until recently, the maximum pension you could get would depend on the number of years of service, as the employer's contribution to EPS was capped at Rs. 15,000.
Pensioners finally got the cap removed in October 2016, so post that the pension you are entitled to would be calculated on the basis of 8.33% of your basic and DA without any ceiling. So, the maximum pension you are entitled to today would be based on your last drawn salary apart from the years of active service (at least ten years).
It is important for you to keep in mind the Supreme Court ruling and ensure that you get a pension based on 8.33% of the employer's contribution without a cap of Rs. 15,000. There are many subscribers who are not aware of these regulations, and hence, you need to educate yourself.
Retire comfortably with EPF
The Employee Provident Fund or EPF has been a boon for the salaried class in India. It is a risk-free form of savings which are deducted from your salary, and therefore, you are not required to make provisions for it.
There are a lot of positive steps being taken by the EPFO to ensure that they are more employee-centric. You can check your EPF balance online, download your UAN or get a printout of your updated passbook.
There are huge tax savings to be enjoyed with EPF, with respect to contribution, interest and withdrawal being tax-free. You can increase your contribution to the Employee Provident Fund through Voluntary Provident Fund. The interest rate is the same, and it is tax-free too. This is a risk-free way of increasing your retirement corpus. However, do keep in mind that the amount accumulated in VPF can only be withdrawn at the time of retirement. The returns, though secure, will not be high as equity and you might not achieve your required retirement corpus. The major change that has taken place is with regard to the maximum pension that you can get on retirement. Till recently, there was a ceiling on the employer's contribution to EPS at Rs. 15,000 which meant that the pension you could expect on retirement would be very low. That has changed, however, with the recent Supreme Court ruling removing the cap. The pension you are entitled to today is based on your last drawn basic salary and DA. This would mean that your post-retirement pension would be substantially higher. The EPFO has recently hiked the contribution to equity to 15% in ETFs. This means that the returns from your provident fund are likely to be higher as equity provides the highest return among all asset classes, in the long run, resulting in a substantially higher retirement corpus. There are proposals to allow investors to select their equity funds in future, which will help you plan your investments better.
