The employee provident fund (EPF) is well renowned fund created by the Employees Provident Fund Organization (EPFO) of India, a statutory body of the Indian Government under the Labour and Employment Ministry for social security of all private salaried employees to provide financial support to them above a certain age, such as post retirement age. It is just such a trust to which they contribute 12 percent of their salary on monthly basis and an equal amount is contributed by their employers each month. However, many people are unaware about its distribution and calculation towards various branches of funds and other pension schemes. This article will open all secrets about your EPF contribution and its allocation which will make you to help in a very beneficial investment decision in building up a sufficient your retirement corpus.

eps

Three Pillars

Currently, the three pillars are in operation under the EPF Act of 1952, and it is into these trusts that your monthly contributions go. One is itself (EPF) Employees’ Provident Fund Scheme (1952), (EDLIS) Employees’ Deposit Linked Insurance Scheme (1976) and (EPS) Employees’ Pension Scheme (1995) are calculated on a basis of your basic plus all cash allowances, which most organizations follow. Your matching contribution by employer is allocated into these three schemes which have own objectives and a lot of benefits to PF members.

EPF Scheme and its contribution

As outlined above the employer makes an equal contribution into your fund but it actually gets split into three schemes as Employee Provident Fund (EPF), Employees’ Pension Scheme (EPS) which offers pension on disablement, widow pension, and pension for nominees and Employees Deposit Linked Insurance Scheme (EDLIS) which offers limited life insurance cover to the PF member.

The government has made significant changes to all these three schemes effective September 1, 2014. Prior to September, salary for the purpose of calculating contribution was limited to Rs. 6,500 per month unless the employer and employee had opted to contribute on a higher salary. The existing salary limit of Rs.6,500 has, now been increased to Rs. 15,000 to ensure higher corpus in future, but the employer’s contribution cannot exceed the pre-determined level of 12% of the basic salary.

For better understanding, we take three situations which envisage the contribution towards the said three schemes. We draw a table in lucid manner for illustrated purpose.

Case 01:

Prashant, who is a record keeper with a mutli-national company, earns a monthly Salary of Rs 10,000 which is above the prior fixed limit of Rs. 6,500. Though he was already contributing Rs 780 per month (12% of Rs. 6,500 towards PF, now he will have to shell out an extra Rs 420 every month while taking his total contribution to Rs 1,200 each month (12% of Rs 10,000). Here’s how the monthly contribution is broken up:

Scheme Name

Contribution borne by What % Prior to Sep 1, 2014 Post to Sep1, 2014

EPF

Employee 12% Rs. 780 Rs.1,200

EPF

Employer 3.67% Rs. 239*

Rs.367

EPS Employer 8.33% Rs. 541*

Rs. 833

EDLIS Employer 0.50% Rs. 32.50*

Rs. 50

EPF Admin Charges

Employer 1.10% Rs. 110

Rs. 110

EDLIS Admin Charges

Employer 0.01% Rs. 0.65*

Rs. 1

*Calculated on previous fixed limit of Rs 6,500 per month.

Similarly, even his employer’s contributing will increase to Rs 1,200 every month, which will be allocated as follows: Rs 833 (8.33percent of Rs 10,000) towards pension scheme and the balance Rs 367 towards PF. The employer would also deposit an additional Rs 17.50 (50-32.50) towards insurance scheme for Prashant.

While considering the same case, alternatively, the employer might decide to calculate the EPS and EPF both on the fixed upper limit. In this case the prior and post EPF contribution respectively would be Rs. 659 and Rs. 367.

Scheme Name

Contribution borne by What % Prior to Sep 1, 2014

Post to Sep1, 2014

EPF

Employee 12% Rs. 780 Rs.1,200

EPF

Employer NA Rs. 659*

Rs.367**

EPS

Employer 8.33% Rs. 541

Rs. 833

EDLIS

Employer 0.50% Rs. 32.50

Rs. 50

EPF Admin Charges Employer 1.10% Rs. 110

Rs. 110

EDLIS Admin Charges

Employer 0.01% Rs. 0.65

Rs. 1

*12% of Rs 10,000, less Rs 541 ;** 12% of Rs 10,000 less Rs 833

With the new salary limit of Rs 15,000 for calculating contributions, the membership is voluntary. For new employees joining the scheme on or after 1 September, 2014 and their earning more than Rs 15,000 in basic plus allowances the contribution required to be made only under PF and insurance scheme; hence such employees will not be contributing to the Pension scheme. The government has also fixed monthly pension benefit at Rs 1,000 for the financial year 2014-15 and increased the lump sum benefit as insurance coverage from Rs 1,56,000 to Rs 3,60,000 including 20% ad hoc benefit over the prescribed amount of 3,00,000. This means that in case an EPFO subscriber dies, his family will be entitled to maximum sum assured of Rs 3.6 lakh instead of existing Rs 1.56 lakh.

Case 02:

Praveen Bhat, a young post-graduate in his first job is earning a monthly salary of Rs 20,000 and joined the company before September 1, 2014. But effective September 1, Praveen’s savings will rise as the contribution will increase to Rs 1,800 (12% of of Rs. 15,000) as employee’s share to the PF, Rs1,250 (8.33% of Rs 15,000) as employer’s share to the pension scheme and balance Rs 550 as employer’s share to the PF.

Case 03:

For Kuldip Singh, who earns the same salary as Mr. Bhat, but has joined the company after 1 September 2014, both employer’s and employee’s share (12% of his salary each) will be allocated fully to the PF, hence he will not eligible towards pension scheme.

Conclusion

On a whole scenario, though the revision of statuary salary ceiling to Rs15,000 one’s take home may be lower but increase in the statutory contribution will boost retirement corpus, one should not rely on the EPF alone. That is because the corpus which you receive at the time of retirement may not be sufficient for the post retirement life, considering rapid increase medical and general inflation. Provident fund can help you accumulate a significant corpus for your retirement, as the contributions happen month on month for your entire working life. Being a very long-term financial goal, some other investment options such as equity mutual funds should also be considered to ensure complete fulfillment of the retirement goal.

 

 

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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