esm7i You’ll probably agree that no matter what type of investor you are, you should have three main objectives in your financial plan:
Create wealth
To retire comfortably
Have a safety net to protect your family financially
Employees Provident Funds Organisation (EPFO) created and administers the Employees Provident Fund (EPF), which can help you achieve all three goals simultaneously!
Find it difficult to believe? I FOUND IT HARD TO BELIEVE when I first heard about the EPF. I am more knowledgeable now that I have actually studied the Employees Provident fund scheme. Today, I decided to be a good neighbor and share everything I have learned about this complex scheme.
What does EPF mean
Employees’ Provident Fund, or EPF commonly called, is a government-sponsored savings plan for salaried workers. This is a three-part avenue of investment that includes the following methods.
The Employees’ Provident Fund (EPF), 1952
It is this part that will allow you to build wealth on a long-term basis. You’ll have to deposit some of your earnings into the EPF scheme throughout your career. When your retirement or death, the accumulated interest will be paid to you or the nominee.
The Employees’ Pension Scheme (EPS), 199
The EPS will help you comfortably retire, as it provides your pension income. Employees aged 58 or older will receive a monthly pension benefit under this scheme. This is a regular income stream that can make retirement more convenient.
Employees’ Deposit Linked Insurance (EDLI), 1976
EDLI provides you with a life insurance cover so your family will be financially protected if something happens to you. If you die, your family receives benefits equivalent to 35 times the average salary of a month, up to a maximum of Rs 7 lakhs.
You have the answer. The EPF is a three-in-one investment option that can help with wealth creation, life insurance coverage, and pension generation.
How does the EPF scheme work
Employees in eligible organizations must contribute a certain percentage of their salaries to their EPF account. Your employer will also match your contribution by depositing the same amount in your EPF Account.
How do these contributions work?
Employee Contribution
This part is pretty straightforward. If you’re an eligible employee, 12% of your monthly salary will be paid directly to the EPF every month.
Employer Contribution
As shown below, the employer’s contribution is divided into multiple parts.
The term “salary” includes the following components to calculate the employee’s and employer’s contributions:
Basic Salary
Dearness Allowance (DA), including the cash value of any concessions allowed to employees.
Retaining allowance (RA) is payable if applicable.
Private companies do not pay dearness allowance. Even retaining allowances are only paid as part of the salary very rarely. If you work in the private sector, your basic salary is likely used to calculate your EPF contributions.
Understanding EPF Contributions
Let me give you some real-life examples to help you better understand EPF contributions. Remember from the table that the employer’s contribution is 8.33%, and the salary limit is Rs 15,000?
We’ll look at two scenarios:
Basic Salary Below Rs 15,000
Basic Salary Above Rs 15,000
Basic salary below Rs 15,000.
Assume that your salary is Rs 10,000. Here’s how employee and employer contributions are split in this scenario.
You can use your entire salary, which is less than Rs 15,000. This will allow you to calculate the employer contribution to your pension account, EPS. What if you earn more than the limit? This is the scenario that follows.
Basic salary exceeds Rs 15,000
Let’s say that your salary is Rs. 20,000. Check out the amount you and your employer will contribute to your EPF account and pension.
As you can see here, the EPS contribution for this year is Rs 1,250 because the salary cap is Rs 15,000. Here’s how you and your employer are calculated.
EPF Eligibility
Not all employers are required to open an account with EPFO. Not all employees are eligible for the EPF scheme. Be sure to check the eligibility rules for the EPF.
The EPFO requires that any company with more than 20 employees register and provide EPF benefits for its employees.
EPF is mandatory for employees with salaries up to Rs 15,000.
Employees are earning more than Rs 15,000. These employees are called non-eligible. They can still be part of the EPF. The employee and the employer must agree to this and obtain permission from the Assistant PF Commissioner.
What are the benefits of the EPF scheme
Regularly contributing to your EPF can give you a triple benefit. Your EPF account offers capital appreciation, insurance coverage, and pension benefits. I will explain how these benefits are calculated.
Benefits of EPF (Employees’ Provident Fund)
Your monthly contributions to your EPF account will earn you interest. The government may revise the interest rate annually at its discretion. The EPF interest rate is 8.10% for 2022-23.
Interest is calculated on your EPF account each month. However, it is credited annually at the end of each financial year. After retirement, you can withdraw your contributions and the interest earned.
Benefits of EPS (Employees’ Pension Scheme)
The EPS provides pension benefits. You will be entitled to these benefits if you have ten years of service. Once you reach 58, you will receive a regular pension.
You will get a pension for life from EPS. In the event of your death, your nominee would receive your pension benefits. The formula used to calculate the monthly pension is:
Monthly Pension = (Pensionable Salary x Pensionable Service) / 70
A pensionable salary is your average salary over the last 12 months. Pensionable service is the number of contributions you have made to your EPS. This period is rounded to the nearest full year. This means that periods of less than six months are rounded down while those of more than six months are rounded up.
Two things are worth noting in this regard.
