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2021

Brief Overview of Employees’ Provident Fund in India

EPF

A provident fund is a government-managed, mandatory retirement savings scheme. It is managed by the Employee Provident Fund Organization. These funds also share some characteristics with pension funds provided by employers.

The purpose of Provident Fund is to provide employees with lump sum payments at the time of exit from their place of employment. This differs from pension funds, which have elements of both lump sum as well as monthly pension payments. 

A portion of the employee’s salary is deducted towards the contribution to the provident fund. Similarly, the employer also needs to make an equal contribution to the fund. The money in the fund is then kept and handled by the Government and ultimately withdrawn by the employee on retirement.

Employee Provident Fund Organization:

• Employees' Provident Fund Organization is a statutory body established by the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 and is under the jurisdiction of the Ministry of Labour and Employment, Government of India.
• EPFO is the regulatory body responsible for the overall supervision and regulation of provident funds in India.
• EPFO assists the Central Board in administering a compulsory contributory Provident Fund Scheme, a Pension Scheme and an Insurance Scheme for the workforce engaged in the organized sector in India.
• The apex decision making body of EPFO is the Central Board of Trustees (CBT).

Types of Provident Funds:

1. Statutory Provident Fund (SPF) / General Provident Fund (GPF):

• These funds are maintained by Government & Semi Government bodies such as Railways, Universities, Local Authorities etc.
• Employer’s Contribution: The contributions made by the employer are exempted from income taxes in the year of such contributions.
• Employee’s Contribution: The contributions made by the employee can be claimed as tax deductions under section 80C.
• Interest amount credited during the financial year is not treated as income and hence it is exempted from income tax.
• The redemption amount at the time of retirement is exempted from tax.
• If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.

2. Recognized Provident Fund (RPF):

• This fund is applied to all the privately owned organizations that contain more than 20 employees.
• Most of the individuals (who are salaried) generally contribute to this type of Provident Fund.
• Organizations which employ less than 20 employees can also join RPF if the employer and employees want to do so.
• The business entity can join either the Government scheme set up by the PF Commissioner or the employer himself can manage the scheme by creating a PF Trust.
• All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax (CIT).
• Employer’s contribution in excess of 12% of salary is treated as income of the employee and is taxable. In excess of 12%, the contributions are taxable in the year of contribution.
• Tax Deduction u/s. 80C is available for amount of contribution by the employee (maximum up to Rs 1.5 Lakh in a Financial Year).
• Interest amount earned on total PF balance including employee’s & employer’s contributions is tax free up to the interest rate of 9.5%. Any interest earned by the employee in excess of 9.5% is taxable as ‘salary’ in the year in which it is accrued.
• Accumulated funds redeemed by the employee at the time of retirement / resignation are exempt from tax if he/she continues the service for 5 years or more.

3. Unrecognized Provident Fund (UPF):

• These are not recognized by Commissioner of Income Tax.
• Employer’s contribution is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free in the year of contribution.
• Tax deduction under section 80c is not available on Employees contributions.
• Interest earned is not treated as income in the year it is credited and hence not taxable in the year of accrual.
• At the time of redemption / retirement, the employer’s contributions and interest thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.

4. Public Provident Fund (PPF):

• A Public Provident Fund is different from above Provident Funds as it is a saving scheme in which any common citizen of India whether in employment or self-employed can contribute.
• Public Provident Fund (PPF) was introduced in India in 1968 with the objective to mobilize small saving in the form of investment, coupled with a return on it.
• It can also be called a savings-cum-tax savings investment vehicle that enables one to build a retirement corpus while saving on annual taxes.
• Anyone looking for a safe investment option to save taxes and earn guaranteed returns should open a PPF account.
• It allows a minimum deposit ₹ 500 & Maximum deposit up to ₹ 1,50,000/- in a Financial year.
• Loan facility is available from 3rd financial year up to 6th financial year.
• Withdrawal is permissible every year from 7th financial year.
• Account matures on completion of fifteen complete financial years from the end of the year in which the account was opened.
• After maturity, account can be extended for any number for a block of 5 years with further deposits.
• Account can be retained indefinitely without further deposit after maturity with the prevailing rate of interest.
• The amount in the PPF account is not subject to attachment under any order or decree of a court of law.
• Deposit qualifies for deduction under Section 80C of Income Tax Act.
• Interest earned in the account is free from Income Tax under Section10 of Income Tax Act.

Meaning of Salary for the Purpose of PF Contribution:

• For the purposes of EPF, salary means only two things – basic and dearness allowance (DA).
• Here salary does not include HRA, Conveyance Allowance, Special Allowance, or any other benefit given in your salary slip.
• Generally, companies in the private sector don’t have a dearness allowance component so it’s only the ‘Basic Salary’ that becomes the base for EPF calculation. Hence, all PF Contribution shall be calculated as percentage of basic salary.

Total PF Contribution:

• If you are an employee, you pay a certain part of your salary towards the EPF scheme. This amount is often matched with an equal contribution from your employer. The combined amount is then deposited with the Employee Provident Fund Organisation (EPFO).
• An employee needs to contribute 12% of Basic Salary and DA towards PF Contribution.
• The contribution by the employee is equally matched by the employer. So that’s another 12%. Therefore, a total of 24% of your basic salary goes to the scheme.
• The above mentioned 24% PF Contribution does not go into a single account. This amount is divided into four different accounts.

Different Accounts of PF Contribution:

• The PF contribution of 24% of salary including employee’s and employer’s contributions is deposited into four different accounts as given below:

 

Contribution by Contribution towards Particulars Rate
Employee EPF Employee’s Contribution towards EPF 12%
Employer EPF Employer’s Contribution towards EPF 3.67%
EPS Employer’s Contribution towards EPS 8.33%
To be paid by employer EDLI EDLI Insurance Premium 0.50%
Admin Charges Admin Charges 0.50%

 

1. A/c No 1: PF Contribution Account:

• The PF Contribution Account is the main account in which entire employee’s contribution of 12% is deposited.
• 3.67% of the employer’s contribution is also deposited in this account.


2. A/C No 10: Employees’ Pension Scheme (EPS) account:

About the Scheme:

• EPF Pension which is technically known as Employees’ Pension Scheme (EPS), is a social security scheme provided by the Employees’ Provident Fund Organisation (EPFO).
• The scheme makes provisions for employees working in the organized sector for a pension after their retirement at the age of 58 years.
• However, the benefits of the scheme can be availed only if the employee has provided a service for at least 10 years (this does not have to be continuous service).
• EPS was launched in 1995 and allowed existing and new EPF members to join the scheme.

Rate of Contribution towards EPS:

• 8.33% of the Employer’s Contribution shall be deposited towards Employees’ Pension Scheme.
• The employee himself shall not contribute towards EPS, only employer’s contribution shall go towards EPS.
• However, for the purpose of calculating the EPS contribution, the rules require that the salary itself should be capped at Rs. 15,000. This means any contribution on any amount of salary over and above Rs. 15,000 shall go to EPF Account No. 1.

3. A/C no 21 EDLI account:

Meaning:

• Employees Deposit Linked Insurance Scheme or EDLI is an insurance cover provided by the EPFO (Employees Provident Fund Organisation) for private sector salaried employees.
• The registered nominee receives a lump-sum payment in the event of the death of the person insured, during the period of the service.
• EDLI applies to all organisations registered under the Employees Provident Fund and Miscellaneous Provisions Act, 1952.
• All such organisations must subscribe to this scheme and offer life insurance benefits to its employees.
• This scheme works in combination with EPF and EPS.
• The extent of the benefit is decided by the last drawn salary of the employee.

Contribution:

• EDLI applies to all employees with a basic salary under Rs. 15,000/- per month. If the basic salary goes above Rs. 15,000 per month, the maximum benefit is capped at Rs. 6,00,000/-
• There is no need for the employees to contribute to EDLI. Their contribution is required only for EPF.
• As per the provisions of the EDLI, the contribution of an employer must be 0.5% of the basic salary or a maximum of Rs. 75 per employee per month.

4. A/C No 2: PF Admin Account:

• The employer has to pay an additional charge for administrative accounts at a rate of 0.50% with effect from 1st June 2018.
• The minimum administrative charge is ₹ 500 and if there is no contribution for a specific month, the employer has to pay a fee of ₹ 75 for that month.

Penalty & Interest for Employers:

Penalty for Late Payment:

 

Delay in Months Penalty as percentage of Default Amount
Up to 2 Months 5%
From 2 to 4 Months 10%
From 4 to 6 Months 15%
More than 6 Months 25%

 

Interest for late payment:

• Under Section 7Q an interest of 12% per annum, is levied on the employer every day in case of failure to deposit the EPF contribution before the deadline.

TDS under Section 192A:

Section 192A of the Income Tax Act, 1961 essentially is concerned with the Tax Deducted at Source or TDS on the withdrawals from the Provident Fund. This is a relative new section introduced in the Income Tax Act w.e.f. 1st June 2015.

TDS on Premature Withdrawal from EFP:

 

Bare Act:

Payment of accumulated balance due to an employee.

 

192A. Notwithstanding anything contained in this Act, the trustees of the Employees' Provident Fund Scheme, 1952, framed under section 5 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952) or any person authorized under the scheme to make payment of accumulated balance due to employees, shall, in a case where the accumulated balance due to an employee participating in a recognised provident fund is includible in his total income owing to the provisions of rule 8 of Part A of the Fourth Schedule not being applicable, at the time of payment of the accumulated balance due to the employee, deduct income-tax thereon at the rate of ten per cent:

 

Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payment to the payee is less than [fifty] thousand rupees:

 

Provided further that any person entitled to receive any amount on which tax is deductible under this section shall furnish his Permanent Account Number to the person responsible for deducting such tax, failing which tax shall be deducted at the maximum marginal rate.

 

• According to Section 192A the trustees of the Employees’ Provident Fund or any person authorized under the scheme are required to deduct tax at source in case the employee doesn’t fulfill conditions stipulated under rule 8 of part A of Fourth Schedule.
• In other words, the TDS is deductible, if the following conditions are satisfied:

1. The amount from EPF has been withdrawn before completion of continuous 5 years of service, and
2. The amount withdrawn is more than INR 50,000.

Threshold Limit and Exemptions under Section 192A:

• Threshold Limit: The threshold limit for TDS deduction under this section is Rs. 50,000. This means no TDS shall be deducted as long as the premature PF withdrawals are up to Rs. 50,000.

Other Exemptions:

• The EPF withdrawal is made after a continuous service of at least 5 years.
• In the event of a job change, the EPF amount has been transferred from one account to another.
• In case of employment termination because of the completion of a project for which the concerned individual was employed. Other than that, termination of employment, discontinuation of employer’s venture, etc. are among other reasons.
• When employees have submitted the Form 15G or Form 15H in addition to PAN.

TDS Rate on PF Withdrawal:

Under TDS Section 192A the entrusted entity deducts tax at source at the rate of 10%. However, one must note that if an employee is unable to provide PAN, then the entrusted entity deducts TDS at the marginal rate, i.e. 34.608%.

 

 

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