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Tuesday, October 25, 2011

HAPPY DIWALI - 2011


Wednesday, October 19, 2011

Everything You Wanted To Know About Your EPF

Our salary slips always show some contribution towards a Provident Fund (PF) account. We also see our employer contributing to the same account. However, most often than not, we are not aware how much is contributed by us and by the employer every month towards the Provident Fund Account.

Let us understand in detail about this long term savings instrument.

Types of PF

Firstly there are 2 types of Provident Funds:
  1. Statutory Provident Fund

    A statutory provident fund is for the government and semi- government employees (ex: railway officer or any other government body/institution)
  2. Recognized Provident Fund

    A Recognized provident fund is the fund which is recognized under Employee Provident Fund and Miscellaneous Provisions (EPF & MP) Act 1952. The recognized provident fund is further classified as 1) Government managed fund and 2) Private trusts managed by the organizations.
There are 3 critical components to Recognized Provident Fund
  1. Employee Provident Fund (EPF)

    In this fund the employee and the employer contribute a defined amount every month with the objective of long term savings/savings for retirement. Here, you contribute 12% of the specified salary (either Rs. 6,500 or your actual Basic if it is higher - whichever you choose) and your employer contributes 3.67% of the specified salary (either Rs. 6,500 or the actual Basic, whichever is higher, if it so chooses)
  2. Employee Pension Scheme (EPS)

    In this fund the employer and the central government contribute a defined amount every month with the sole objective of providing regular pension to the employee post retirement. You as an employee do not contribute to your own Pension Scheme, this is contributed by your employer and by the Central Government. Your employer contributes 8.33% of Rs. 6,500 Basic salary to the Employee Pension Scheme, and the Central Government contributes 1.16% of the same. The EPS provides you with regular annuity after your retirement.

  3. Employee Deposit Linked Insurance (EDLI)
  4. This scheme was introduced in 1976 and it provides life insurance cover to the members of Employee Provident Fund. The insurance amount is linked to the balance in the employee's PF account with a maximum cover of Rs. 60000/- at any time. Only the employer contributes towards this scheme which is 0.5% of Rs.6500/-

    As per the Employee Provident Fund and Miscellaneous Provisions (EPF & MP) Act 1952, an establishment having 20 or more on-roll employees need to make contributions towards the Provident Fund. If a corporate hires majority of its employees on a contractual basis, and has less than 20 employees occupying permanent positions on the rolls of the company, then it would not contribute to the Provident Fund.
The contribution needs to be at least the lower of the following for both the employer and the employee:
  1. 12% of Specified salary (Basic)

    OR
  2. 12% of Rs. 6,500/- (i.e. Rs. 780)
Contribution Matrix:

Employee Contribution - Total 12% of specified Salary ---> 12% goes towards EPF & 0% towards EPS** Employer Contribution - Total 12% of specified Salary ---> 3.67% goes towards EPF & 8.33% towards EPS**
Central Government - Total 1.16% of specified salary ---> 0% goes towards EPF & 1.16% towards EPS**

Total Contribution per month -15.67% towards EPF & 9.49% towards EPS**

Let's take an example to understand the matrix:

Scenario 1

Mr. Shah, our favourite fictional case study character, draws a Basic salary of Rs. 25000/- per month and the employer's contribution towards PF is similar to Mr. Shah's contribution. Their contribution is not on specified salary but on the statutory limit of Rs. 6500/-

Mr. Shah's Contribution - Total 12% of 6,500 out of which Rs. 780 towards EPF and Rs. 0 towards EPS Employer Contribution - Total 12% of 6,500 out of which Rs. 239 towards EPF and Rs. 541 towards EPS Central Government - Total 1.16% of 6,500 out of which Rs. 0 towards EPF and Rs. 75.40 towards EPS

Total Contribution per month - Rs. 1,019 towards EPF and Rs. 616.40 towards EPS

Please Note:
Out of the 12% contribution from the employer, 8.33% of the contribution, subject to a maximum of Rs. 541 per month, is contributed to the Employee Pension Scheme.

So in the case above where Mr. Shah's Basic Salary is Rs. 25,000, and his employer also contributes on 12% of the actual Basic i.e. 12% of Rs. 25,000, totally, only 8.33% of Rs. 25,000 subject to a maximum of Rs. 541 gets contributed to the EPS, and the rest is contributed to Mr. Shah's PF account.

Based on this, the following contributions are made by his employer:

Employer's contribution to Mr. Shah's EPS: 8.33% of Rs. 25,000 = Rs. 2082.50, subject to max of Rs. 541
So, employer's contribution to Mr. Shah's EPS: Rs. 541
Employer's contribution to Mr. Shah's PF: 12% of Basic less EPS contribution = Rs. 2,459

Scenario 2

Mr. Shah's Contribution - Total 12% of 25,000 out of which Rs. 3,000 towards EPF and Rs. 0 towards EPS Employer Contribution - Total 12% of 25,000 out of which Rs. 2,459 towards EPF and Rs. 541* towards EPS
Central Government - Total 1.16% of 6500 out of which Rs. 0 towards EPF and Rs. 75.40* towards EPS

Total Contribution per month - Rs. 5,459 towards EPF and Rs. 616.40 towards EPS

*(Note: Contribution by Employer and Central Government towards EPS (Employee Pension Scheme) is always on Rs. 6500/- (i.e. in case of Employers contribution the balance is contributed towards EPF: Rs. 3,000-541= 2,459)

Hence, as seen in the above two scenarios, you and your employer would be either contributing Rs.780 and Rs.239 respectively towards your PF account or 12% and 3.67% of your specified salary (Basic) towards your PF account.

Additionally, you can choose to increase your own PF contribution from Rs. 780 to 12% of your Basic, but if you do so, your employer need not do the same, your employer can continue to contribute Rs. 239 toward your PF account, based on the basic salary of Rs. 6,500.

Contributing towards Provident Fund always proves to be fruitful because of the following reasons:
  1. Employee's contribution towards PF is exempt from tax u/s 80C of Income Tax Act, 1961, with a maximum limit of Rs.1 Lakh.
  2. Interest accumulated is tax free.
  3. Safest instrument as return is guaranteed by the government.
  4. The entire corpus is tax free during maturity.
(Note: Employer's contribution is tax free during maturity only if the account is active and maintained for a minimum of 5 years)

There are some points to be noted to make the most of your EPF, which are as follows:
  1. Always make sure you have nominated someone for your PF account. You can nominate one or more nominees for the account. They should be your family members. Only if a person doesn't have a family, can he nominate any other person.
  2. Even if you shift your job, always maintain one PF account. This will be beneficial over the long run due to compounding of interest in the same account and secondly becomes easier to track.
  3. Provident Fund account gives 8.5% tax free return (except in 2010-11 where EPFO declared interest at 9.5%) which comes to 12.14% pre tax return. This is much higher than the Bank FD rates and more secured. Additionally, EPF is tax deductible from your salary under Section 80C so you do not pay any tax on this part of your income. So you have a dual tax benefit on your EPF.
  4. You also have the option of contributing to the Voluntary Provident Fund (VPF). As an employee, you have the option of contributing an additional 88% of your Basic to the VPF. This brings y our total contribution of EPF + VPF to 100% of your Basic + DA.
    This will earn you the same tax free rate of interest of 8.50% p.a., however this amount is not tax deductible over and above the limit of Rs. 1 lakh under Section 80C.
    Additionally, your employer will not contribute to your VPF, this contribution is done solely by you.
What are the Forms I need to make changes in my EPF account?

While the EPF is a safe and strong investment avenue for the salaried class, you might want to make changes such as transferring your PF from one employer to another if you change your job, or withdrawing your PF, or availing advances / withdrawals and so on. If you want to make any such movements in your PF, you will need to fill the relevant form and submit it to the EPFO.

A list of useful forms is given below:
  1. To shift your PF from one employer to another:
    You will need Form 13.
  2. To avail an advance or to withdraw part or all of your PF contribution for certain specified reasons: You will need Form 31.

    If you are withdrawing your PF for purchase, construction or remodeling of a house or plot, you will also need to submit a declaration stating the exact reason and furnishing relevant proofs. There is a format for the declaration available on the EPF India website.
  3. To apply for financing a life insurance policy out of your PF account:
    You will need Form 14
  4. To withdraw your PF on retirement / leaving the job / termination:
    You will need Form 19
  5. If you are a nominee and need to claim the PF account of a deceased family member:
    You will need Form 20.
Conclusion

As you can see, there's a lot more to the EPF than meets the eye. So do go through your salary slip and decide whether you would like to increase your EPF contribution and avail the tax benefit.

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