EPF Provisions applicable to IT companies in India

EPF Provisions applicable to IT companies in India

Employees receive benefits from their government and their employers in any country across the globe. Some of these benefits are mandatory, while some are voluntary. According to the employers, such employee benefits keep employees happy and committed to their work. On the other hand, employees feel that employers and government value them, and these benefits enable employees to keep their families and future safe. One of the key benefits that employees in India receive is the retirement benefits through the Employees’ Provident Fund (EPF). In this article, we answer all your questions regarding EPF provisions applicable to IT companies in India.

What is the EPF Scheme?

EPF is a retirement benefits scheme available to all salaried employees. Herein, both the employer and the employee contribute equally at 12% of the employee’s basic salary and dearness allowance to the scheme. On the retirement of the employee from the organization, a lump sum amount is paid to the employee along with the interest component. The main purpose behind this scheme is to facilitate the saving of money by the salaried class of people so that they have enough amounts for daily life after retirement. The employees also have the option of a loan facility from the EPFO when needed.

Who operates and administers the EPF Scheme?

The Employees’ Provident Fund Organization (EPFO), which is a retirement fund body providing mandatory Universal Social Security Coverage to all salaried employees in India, operates and maintains this scheme. The Ministry of Labour and Employment manages the operations of EPFO under the direct jurisdiction of the government. Besides the EPF, EPFO also operates two other schemes – Employees’ Pension Scheme (EPS) and Employees Deposit Linked Insurance Scheme (EDLI). The Central Board of Trustees consisting of one representative from each of the employers, employees, and government manages and administers this scheme. EPFO provides the required support in the Board’s activities.

Are you eligible for EPF?

The key criteria to be satisfied by employees and employers under EPF are as follows:
  • All employees from the public and private sectors can apply for the membership of EPF India.
  • A salaried employee with a monthly salary (basic salary plus dearness allowance) of less than INR 15,000.00 is mandatorily required to get the EPF account opened by the employer.
  • A salaried employee with a monthly salary (basic salary plus dearness allowance) of more than INR 15,000.00 can register with the EPF scheme if approved by the employer and the Assistant PF Commissioner.
  • An organization with 20 or more employees is mandatorily required to register for EPF and provide EPF benefits to all its employees.
  • Organizations with less than 20 employees can voluntarily register with the EPF scheme.

How much do you contribute to the scheme?

The employer and employee contribute 12% of the monthly salary, which is the amount equal to the total of basic salary plus dearness allowance plus retaining allowance. Of the employer’s contribution of 12%, 8.33% is deposited in the EPS. The remaining 3.67% is retained within the EPF account. The contribution from both parties is deposited in the EPFO account.

In the case of employers with less than 20 employees, who register to this scheme voluntarily, employers and employees both, contribute only 10% per month. The 10% contribution rate also applies to those organizations who are declared sick by the Board for Industrial and Financial Reconstruction; entities, which operate under the wage limit of INR 6,000.00; guar, beedi, jute, coir, brick, and gum industries; and companies, whose losses at the end of the financial year are greater than or equal to the net worth for that year.

In addition to the 8.33% contributed towards EPS and 3.67% towards EPF, the employer is also required to contribute 0.5% of the monthly salary to the EDLI. Furthermore, the employer is mandated to take care of the administration costs PF scheme, which is at the rate of 0.5% respectively. Therefore, the total contribution of employers towards EPFO-run schemes is 13.00% of the monthly salary of employees.

How do you access your EPF account?

Universal Account Number (UAN) was introduced by EPFO and is different from the EPF number. If an EPF member intends to visit his/her EPF account in entire – that is, with former and current employers, then the UAN number helps. The member can view the accounts, close them if required, and transfer the balances. However, for any of this, the UAN number must be activated.

What are the interest rates?

The EPFO sets a fixed rate of interest that is applicable to these contributions for each year. For the financial year 2021-22, the applicable pre-fixed interest rate is 8.50%. The interest is calculated monthly but is transferred to the EPFO account yearly at the end of the year i.e. March 31.

Are there any tax concerns?

EPF in India has the EEE (exempt-exempt-exempt) status. The interest earned on this amount is tax-free; the employee can show the 12% contribution to the EPF as a deduction under Section 80C of the Income Tax Act; and the eventual withdrawal amount from the EPF account after the mandatory period of five years is exempt from income tax. However, the withdrawal amount from the EPF account is taxable under certain circumstances:

  • If the withdrawn amount is less than INR 50,000.00 before completion of five years of service: No TDS is deducted, provided the employee proves it as income while calculating the taxable income for that financial year.
  • If the withdrawn amount is greater than INR 50,000.00 before completion of five years of service: No TDS is deducted, if the form 15H/15H is furnished and if only PAN is furnished, TDS at 10% is deducted.
  • In the case of withdrawal of EPF after five years of continuous services, no TDS is deducted. Furthermore, the employee is not required to provide it as proof in the filing of IT returns.
  • In the case of the transfer of PF from one account to another upon a change of job by the employee, there is no TDS. Furthermore, the employee is not required to provide it as proof in the filing of IT returns.
  • If employee withdraws before completion of five years of service due to discontinuation of employer’s business, termination of employment due to employee’s ill health, or if the reasons for withdrawing money are beyond the employee’s control, then there is no TDS. Furthermore, the employee is not required to provide it as proof in the filing of IT returns.
  • The Finance Act, 2020 introduced a new provision under the Income-tax Act, 1961 by virtue of which employer contribution to PF, NPS or Superannuation Fund exceeding INR 7,50,000 p.a. in aggregate is now taxable in the hands of the employee as perquisite
  • During Budget 2021, Sitharaman announced interest earned on the EPF contributions (only employee contribution) above INR 2,50,000 will be taxable from 1 April 2021. Therefore, if employees’ contribution to provident fund on or after 1 April 2021 exceeds INR 2,50,000 in any year, interest earned on contribution over INR 2,50,000.00 lakh shall be taxable.

What are dormant or inoperative accounts?

In case there is no contribution towards an EPF account for a continuous period of 36 months, the account becomes dormant and hence, inoperative. In the case of dormant accounts of employees, with many years of service still left, interest is offered on these accounts. However, if the employees have retired and the EPF account is dormant, there is no interest amount applicable to the amount deposited in such accounts. Whatever the case be, the interest earned on dormant accounts is taxed at the rate applicable to the EPF member’s income slab. Employees can withdraw the amount from dormant accounts using the UAN number or just transfer the amount from the dormant account to the current EPF account.

What are the different conditions under which we can withdraw funds, and how much?

Employees generally withdraw EPF on retirement. In the case of an unemployed employee and after retirement, the individual can withdraw 75% of the cumulative amount after one month of cessation of their services, while the remaining 25% can be withdrawn after two months of cessation of their services. However, the unemployed individual is required to submit a certificate of unemployment, which is signed by a gazetted officer. If the service period has been less than 10 years, the employee is allowed to withdraw the EPF amount. There are other conditions and reasons wherein the employee can withdraw the amount; however, there is a limitation on the amount that can be withdrawn:

Marriage

In the case of marriage of self, son/daughter, or brother/sister, the employee can withdraw the balance from EPF; however, he/she must have completed at least seven years of service. Besides, the employee can withdraw only 50% of the employee’s share of contribution to the EPF scheme

Education

In the case of education of self or son/daughter after class 10, the employee can withdraw the balance from EPF; however, he/she must have completed at least seven years of service. In addition, the employee can withdraw only 50% of the employee’s share of contribution to the EPF scheme.

Purchase of land or purchase or construction of the house

If the land or the house that is bought is in the name of the employer or his/her spouse or joint name and the employee has completed five years of service, only then the balance can be withdrawn from the EPF account. However, the employee can withdraw only 24 times the monthly wages plus dearness allowance in case of land while 36 times the monthly wages plus dearness allowance in the case of a house.

Renovation of the house

If the employee requires money for the renovation of the house, which is registered in the name of the employee or spouse or jointly, he/she should have completed at least five years of service. However, the withdrawal amount can be only up to 12 times the monthly wages.

Home loan repayment

In case if the employee has completed 10 years of services and requires money for home loan repayment, the employee can withdraw up to a maximum of 90% amount from the EPF account from both employee’s and employer’s contribution. However, the property must have been registered in the name of the employee or spouse or jointly, the accumulated amount in the employee’s EPF account along with the interest component must be more than INR20,000.0, and withdrawal is permitted only if the employee submits the requisite documents as a proof of availing of housing loan to the EPFO.

What are the advantages of EPF?

Following are the advantages of the EPF scheme:

Tax benefits

The majority of the components of EPF are tax-free. An employee’s contribution to the EPF is tax-exempt under Section 80C, and the interest earned on the amount is exempt from tax. If the employee withdraws the balance amount from the EPF account after the mandatory five years of continuous service, the amount is not taxable. Furthermore, even an inoperative EPF account that is dormant for more than three years continues to earn interest.

Pension benefits

Employer’s contribution of 12% of salary in the EPF account comprises of 8.33% that is diverted to the EPS account. Furthermore, 10 years of contributory membership of EPS leads to the generation of lifelong pension benefits.

Insurance benefits

EPFO also provides insurance coverage under the EDLI scheme. If the employee has an EPF account, then he/she is automatically eligible for this scheme. The employer contributes 0.5% of the basic salary up to a maximum of INR75.0 per employee per month, while the employee is not required to contribute separately for it. The benefit from this scheme is that if the person insured dies during the service period, the nominee receives a lump sum payment.

Option to withdraw prematurely

While it is advisable not to withdraw the EPF money before the compulsory five years of service; however, if members require money for home loan repayment, medical treatment, or in times of unemployment, then a partial withdrawal option is available to employees after five to 10 years of service.

Long-term savings

It ensures that the employees make long-term savings since the withdrawal of the entire amount before retirement is difficult.

Benefits in times of uncertain events

The employees and their nominees can withdraw the funds along with the interest amount from the EPF account in certain bad circumstances such as the death of the employee, disability of the employee, and retrenchment from the job.

Accessibility

Employees can easily access their EPF accounts through the EPF member portal using their UAN number, and they can also transfer their accounts while changing their jobs.

What are the disadvantages of EPF?

Following are the disadvantages of the EPF scheme:
  • EPF is a debt-based investment scheme. Since there is no equity component in EPF, in the case of the inflationary scenario in the country, the employees may obtain negative returns.
  • Most of the EPF members withdraw their EPF amount when they change their jobs, and this amount is generally used in discretionary expenses, and hence, the amount that was kept as savings for use after retirement becomes zero again.
  • Some employees withdraw their EPF balance amount prior to the completion of five years; in that case, this amount is taxed at the rate of the member’s income slab.