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The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 applies to all states in India except Jammu and Kashmir. The purpose of a Provident Fund is to provide financial security and stability to employees on retirement. When one begins employment, they are expected to contribute on a regularly basis (typically monthly) to their PF. The employer is also expected to contribute to its employee’s retirement fund.
In Oct 2014, the Employees Provident Fund Organization (EPFO) launched a Universal Account Number (UAN) where every employee was given a unique Provident Fund (PF) account number which is not associated with a particular employer. Therefore, an employee can now change a job without having to transfer funds from one account to another.
The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 applies to:
Any business or establishment within these industries (Industry List) or any activity notified by Central Government in the Official Gazette
Employs 20 or more employees (including contract workers)
Applicable to cinema theatres with over 5 employees
Once registered, a business will continue to be applicable and liable under the Act even if the employee count falls below 20 persons
Business that do not meet the criteria above can choose to voluntarily register with the EPFO under Section 1(4) if the employer and employees are both willing.
The required contributions to PF by employee and employer are explained below as EPF Admin Charges and EDLI Admin Charges. The Employees contribution is matched by the Employer till 12%. PF and EPS (Employees’ Pension scheme) are calculated on basic salary, dearness allowance (DA), cash value of food concession and retaining allowances if any. Most companies base it of (Basic + DA).
0.85% of total employee PF wages
Minimum of Rs. 75 per month in the case of a non-functional establishment having no contributory member
Minimum of Rs. 500 per month for contributory members
0.01% of total EDLI salary
Minimum of Rs. 25 per month in the case of a non-functional establishment having no contributory member
Minimum of Rs. 200 per month for contributory members
All employee PF contributions are pooled into a fund that earn an interest at a Government set annual rate which is generally higher than the prevailing market interest rate. Interest is credited to the account on a monthly basis.
The contribution paid by the employer is 12% of basic wages plus dearness allowance plus retaining allowance. An equal contribution is payable by the employee also. In the case of establishments which employ less than 20 employees or meet certain other conditions, as per the EPFO rules, the contribution rate for both employees and the employer is limited to 10 percent.
For most employees of the private sector, it’s the basic salary on which the contribution is calculated. For example, if the monthly basic salary is Rs 30,000, the employee contribution towards his or her EPF would be Rs 3,600 a month (12 percent of basic pay) while the equal amount is contributed by the employer each month.
It should, however, be stated that not all of the employer’s share moves into the EPF kitty. Out of employer’s contribution, 8.33% will be diverted to Employees’ Pension Scheme, but it is calculated on Rs 15,000. So, for every employee with basic pay equal to Rs 15,000 or more, the diversion is Rs 1,250 each month into EPS. If the basic pay is less than Rs 15000 then 8.33% of that full amount will go into EPS. The balance will be retained in the EPF scheme. On retirement, the employee will get his full share plus the balance of Employer’s share retained to his credit in EPF account.
The employee can voluntarily pay higher contributions above the statutory rate of 12 percent of basic pay. This is called contribution towards Voluntary Provident Fund (VPF) which is accounted for separately. This VPF also earns tax-free interest. However, the employer does not have to match such voluntary contribution.
According to the EPF Act, for claiming final PF settlement, one has to retire from service after attaining 55 years of age. The total EPF balance includes the employee’s contribution and that of the employer, along with the accrued interest.
There is, however, a window to partially withdraw the amount for those nearing retirement. Anyone over 54 can withdraw up to 90 percent of the accumulated balance with interest. But what if someone decides to quit his job before reaching 55? Under the existing rule, the employees, in such cases, can withdraw the full PF balance if he is out of employment for 60 straight days or more.
There was a proposal which restricted employee access to a part of the funds, allowing for the withdrawal of the employer contribution only after attaining the age of 58 years, which is suspended as of now.
To withdraw money, one may now use ‘UAN based Form 19’ and in effect bypass the employer signature requirement. This facility will be available to all those subscribers whose UAN is activated and seeded with the KYC details like bank account and Aadhaar number. Currently, the form has to be submitted offline, but the EPFO is expected to extend this facility online too.
The Interest in EPF is calculated on the basis of monthly running balance.
UAN stands for Universal Account Number to be allotted by EPFO. The UAN will act as an umbrella for the multiple Member IDs allotted to an individual by different establishments. The idea is to link multiple Member Identification Numbers (Member Id) allotted to a single member under single Universal Account Number.
UAN will help the member to view details of all the Member Identification Numbers (Member Id) linked to it. If a member is already allotted (UAN then he/she is required to provide the same on joining new establishment to enable the employer to in-turn mark the new allotted Member Identification Number (Member Id) to the already allotted Universal Identification Number (UAN).
UAN has been made mandatory for all employees and will help in managing the EPF account. It will also allow for easier PF transfer and withdrawals. Remember, in most cases, the employer provides the UAN and the employee just has to get it activated by providing relevant KYC documents to the employer. So, if employees are changing jobs and already have a UAN, employee need not get a new UAN from their new employer. It is a one-time permanent number which will remain the same throughout one’s career.
When an employee joins a new organisation, the first thing he/she should do is ask their employer for the ‘New Form No. 11- Declaration Form’ to furnish the existing UAN. If employee don’t have one, then just give their previous PF number along with the date of exit from their previous job.
Typically, in early and mid-years of their careers, employees tend to switch jobs. After leaving, they have two options with regard to their EPF. Either they can withdraw it after waiting for 60 days (if unemployed) or transfer the balance to the new employer.
The EPF withdrawal is not taxable if one has completed at least five years of continuous service. If one has switched jobs in less than five years but transferred the EPF to the new employer, it will be counted as continuous service. Someone, for instance, works for 1.5 years and then joins another organisation. He transfers his PF balance on to the new employer where he continues to work for 3.5 years. Taken together, it will be five continuous years of service for the employee. It is, therefore, better to transfer the existing PF to the new employer.
Withdrawing the PF balance without completing five continuous years of service has tax implications. The total employer’s contribution amount along with the interest earned will be taxable in the year of withdrawal. Also, the amount of deduction claimed under Section 80C on one’s own contribution will be added to one’s income in the year of withdrawal. In addition, the interest earned on one’s own contribution will also be subject to tax.
The government has introduced Tax Deducted at Source (TDS) on PF withdrawals in order to discourage premature withdrawals and promote long-term savings. No tax is deducted if the employee withdraws PF after five years. Also, TDS shall not be applicable in case of PF transfer from one account to another. From June 1, 2016, for TDS, the threshold limit of PF withdrawal has been raised from Rs 30,000 to Rs 50,000. TDS will be applicable at the rate of 10 per cent provided PAN card is submitted.
Contributions towards Employees' Provident Fund (EPF) are meant to take care of one’s post-retirement needs. But you don’t have to wait till you retire to lay your hands on it. The EPFO allows you to access your EPF even during the course of employment. Such withdrawals are treated as ‘advances’ and not loans.
Such advances are allowed only under specific situations – buying a house, repaying a home loan, medical needs, education or marriage of children, etc. Also, the amount that employee can take as an advance will depend on the specific situation, the number of years of service, etc. As it’s not a loan, one need not pay any interest on such advances. Unlike a loan, it is not necessary to repay the advance.
If employees have their Know Your Customer (KYC) compliant Universal Account Number (UAN), which is activated and seeded to their bank account, they don’t even have to go through their employer to get hold of their EPF. The UAN Based Form 31 (New) can be directly submitted to the EPFO. Else, they may fill in Form 31 and submit it to the EPFO through their employer.
The employee can take the advance for buying or building a house or buying a plot of land and even for construction of a house on a plot owned by the member. The advance can also be taken for repayment of the outstanding home loan, for self or family member’s medical treatment, for the marriage of self/daughter/son/brother/sister or for post-matriculation education of son/daughter.
Every employee who joins the EPF Scheme is required to furnish a declaration and Nomination Form in the prescribed Form No.2 (Revised) to his employer for onward transmission to the Regional Provident Fund Commissioner concerned. This nomination form enables the member to give details of his nominee for Provident Fund and list of family members and nominee for Pension Scheme. There is no separate nomination form for EDLI Scheme as the PF beneficiary is eligible to receive the EDLI benefit.
The nomination is considered as a very vital document for each PF member because in case of death of a Provident Fund member, the Provident Fund balances are payable to the nominee in the first instance. Only in case there is no valid eligible nominee, it is distributed to the family members in equal shares. In the absence of nominee as well as eligible family members, the amount will be distributed to the legally entitled persons.
A member having a ‘Family’ viz. wife/husband, children and dependent parents (according to the definition of family) is required to nominate one or more persons belonging to his family only. If the member has no family members, he can nominate any person/s; but if the member acquires a family, such nomination is deemed as invalid. The member should make a fresh nomination.
In the case of nomination for pension it may be noted that the family pension is automatically payable to the family (i.e.) Widow or Widower along with two children (below 25 years). As such, as long as the family members survive as on the date of death of the member the pension is payable to them only and the nomination will have no effect.
Where there is no eligible family member i.e.Widow or Widower and Children below 25 years, as on the date of death of a member then the family pension is payable to the nominee as given in Form 2. Hence, it is necessary to file a nomination. The nominee should be from the ‘family’ i.e. the nominee for Pension need not be the spouse, as he/she is an automatic beneficiary. Hence, any child (below 25 years) should be nominated for Pension. The nomination for pension should be in favour of one person only.
EPFO has recently allowed members i.e. the contributory employees of the Provident Fund (PF) scheme to use 90 percent of EPF accumulations to make down payments to buy houses and use their accounts for paying EMIs of home loans.
Under the new rules, an essential requirement for a PF member to withdraw one’s PF money to buy a real estate property is that he or she has to be a member of a registered housing society having at least 10 members.
As a member, one can use the PF funds for an outright purchase, as a down payment for a home loan, for buying plots, or for the construction of a house. The transactions can be made through central government, state government and even from a private builder, promoters or developers. Only those members who have completed 3 years as a PF member will be eligible for this scheme.
Currently, the EPF interest rate stands at 8.55 percent. In terms of returns from a debt instrument, EPF certainly stands tall. The money is sovereign-backed and the interest earned is tax-free. In fact, it enjoys the Exempt, Exempt, Exempt (EEE) status as contributions are deductible from income. There is hardly any debt product that gives such high return with safety and assurance. Therefore, it’s better to transfer employee PF account when you switch jobs and avoid the temptation to withdraw the amount.
Is it compulsory for the employer to pay the contribution under the Act? Or is it is mandatory for the employer to pay Employees' Provident Fund Contribution even when wages are not paid to the employees? OR On default of payment of the contribution by the Employer, how and by whom can the contribution amount be recovered?
The Provident Fund dues of the member will be paid only to the extent the amount is realised from the employer. The members’ share alone is payable from the Special Reserve Fund. In case the establishment is closed for more than five years or it is under liquidation the question of paying the employer’s share will also be considered from the Special Reserve Fund.
What are the penalties an employer shall face on non-compliance of the provisions of the Act?
Attachment of Bank Accounts, Realisation of dues from Debtors, Attachment of properties, Arrest and Detention, Action under Section 406/409 of Indian Penal Code and Section 110 of Criminal Procedure Code, Prosecution.