Ask an employee about Employees' Provident Fund (EPF) and the most likely answer is that it is a part of their salary to be contributed every month. While employees divert 12 per cent of their basic salary towards EPF, their employers give an equal amount each month. But, this is not all.
There are several crucial aspects about EPF that many would not know. For instance, there are two elements to EPF - EPF and Employees' Pension Scheme (EPS). The 12 per cent employee contribution goes to EPF. However, the employer's contribution is divided in 8.33 per cent that goes in EPS, subject to a maximum of Rs 541 a month. The rest goes to EPF.
However, an employee is eligible to earn pension only on attaining 58 years of age, after completing 10 years of service. Or, on having contributed to it for 20 years. In either case, the pensionable service or number of years of contribution are increased by two years. "For instance, one has attained 58 years and contributed for 25 years. Then, the pensionable service will be taken as 27 years. Or, if contributed for 20 years, then it will be considered as 27 years," explains certified financial planner Pankaj Mathpal. Here are some more:
Not compulsory for all
If you earn more than Rs 6,500 a month, you can always opt out of contributing towards EPF. Unfortunately, you need to opt out of it at the start of your career. If you have been a part of EPF even once, then you aren't allowed to not contribute. So, new joinees who do not have an EPF account number can ask their employers to not be a part of EPF contribution. Although this will increase your in-hand salary, financial planners are not in favour of taking this route, as EPF is the easiest way of building a retirement corpus, earning a handsome interest income of 8.5 per cent for 2012-13.
Entire corpus can't be withdrawn
It is not possible to withdraw the entire EPF corpus even after five years of continued service. This is because there are separate rules for EPS for services up to nine years. Table D of EPS indicates how much can an individual get depending on the year of service in which he quits his job. There is a slab for each completed year, subject to a maximum to Rs 6,500 a month.
Does not earn interest
Your EPF account does not earn compounded interest each year on the total monthly contribution. The compounded interest is paid only on the EPF part. The EPS part does not get any interest, says E Balaji, managing director and CEO at Randstad India.
Withdrawing EPF during job change illegal
According to EPF norms, withdrawing an EPF corpus at the time of switching jobs is illegal. You can only withdraw it if you are not going to join any organisation and two months after quitting. You can transfer the amount once you get a new job. "Many people withdraw telling employers that they have been unemployed for two months and later take up a job. But that is incorrect," says Mathpal.
Can be withdrawn on special occasions
While EPF cannot be withdrawn if you are yet to complete five years of service, you can do so on specific occasions. Of course, the withdrawal can only be partial. For instance, you can withdraw from EPF for the marriage or education of your self, children or sibling. If you've completed a minimum of seven years of service, 50 per cent of your contribution can be withdrawn three times in your working life. Similarly, for medical treatment for self or family (spouse, children, dependent parents), you can get a maximum of six times your salary.
You can also withdraw for the purpose of repaying a housing loan for a house owned by you or spouse or jointly by both of you. However, for this, you should have completed at least 10 years of service. Then, you can withdraw up to 36 times your salary. Withdrawing is allowed towards the cost of alterations/repairs to an existing home owned by you or your spouse or jointly by both of you. You need a minimum service of five years for alterations and 10 years for repairs after the house was built/bought. You can draw up to 12 times your pay, but just once.
However, do not touch the corpus unless in dire need.
Allows voluntary contribution
You can always invest more than 12 per cent of your basic salary in EPF voluntarily. This extra, as it is coming from the employee side, is invested in EPF and earns interest on it. The employer is not bound to match the extra contribution. It will continue investing up to a maximum of 12 per cent of the employee's basic pay.
Gives life insurance
If your employer does not provide group life insurance cover to its employees, EPF covers the employees with a small cover (maximum of Rs 60,000). This comes from the Employees' Deposit Linked Insurance Scheme and such employers have to contribute 0.5 per cent of your monthly basic pay, capped at Rs 6,500, as premium for your life cover. Mostly, small scale industries' employees get this cover. Companies that already provide life insurance benefits to employees are exempted from this scheme.