Employee’s Provident Fund (EPF) is a benefit scheme for salaried individuals for their old age after their retirement. It is not only tax saving instrument but it also provides security and stability to the employee and his family as well.
Under Employee’s Provident Fund and Miscellaneous provisions act 1952 or PF act employees are required to contribute 12% of their salaries towards Provident Fund (PF) with equal contribution by their employers.
In the case of employee not being International Worker (IW) (foreign employees coming to India or Indian going abroad for work) subject to conditions, it is mandatory for employer to contribute towards PF if the number of employees in his firm is 20 or more having salary upto Rs 6,500 monthly. However, employees earning monthly salary more then Rs 6,500 can voluntarily choose to contribute to the scheme.
Salary for the purpose of PF: Salary for the purpose of PF would include basic wages, dearness allowance (including cash value for food concession) and retaining allowance.
Basic wages means all emoluments earned by an employee while on duty/ leave/ holiday, according to the terms of the employment or which are paid or payable in cash. This does not include house-rent allowance, bonus, overtime allowance, commission or any other such allowance.
Contribution of employer for PF: Statutory rate of contribution is 12% (10% for spinning sector and other specific industry) of the salary towards PF and it is tax-free under income tax act. Out of 12% of the employer’s contribution 8.33% is required to be remitted towards pension fund and 0.5% towards Employee’s Deposit Linked Insurance Scheme (EDLIS)’ 1976.
Contribution of employee towards PF: An employee can claim deduction upto Rs 1 lakh per annum under section 80C of Income Tax Act 1961, on his contribution towards PF from his taxable income.
Contribution of employee should be equal to the contribution payable by the employer. However, the employee may at his option contribute an amount more than 12% subject to condition that the employer shall not be under an obligation to contribute over and above his contribution payable under PF act.
Interest on PF: Employees earn interest on both contribution done on his own and contribution made by his employer and interest earned up to 9.5% is exempted from tax.
Transfer of PF: If employee changes his employment then employee is required to change his PF balance under new employer’s account. Such transfer does not entail any tax implication on the employee.
Withdrawal of PF: A member of PF will not be taxed on the withdrawal of PF in conditions such as if he retires after the age of 58 years, if he retires due to permanent and total incapacity for work due to bodily or mental infirmity, termination of service in the case of mass or individual retrenchment, after two months of resignation in the case of no employment.
Taxability in the case of premature withdrawal: If employee had rendered less than five years of continuous service, the employer’s contribution and interest, thereon will be fully taxable as salary income in the hands of the individual. Employee’s contribution will be taxable to the extend of deduction claimed under section 80C, if any, under Income Tax Act 1961 and interest earned on employee’s total contribution would be taxable as income from other sources in the hand of the employee.