Understanding EPF : Business Line

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Every month your employer deducts an amount from your pay towards PF. But have you ever found out where the money goes? Did you know that your employer also makes an equal contribution from his pocket for your provident fund and together, a sum is being set aside , even as you read this, for your retirement?

Provident Fund is a retirement benefit scheme, the funds of which are managed by the Central Government (the employer can choose to leave the funds with private trusts too). The money in this fund earns interest at the rate determined by the Central Government. For 2010-11, employees will earn interest of 9.5 per cent on their savings in PF account.

Here, we take you into greater detail of how employee provident schemes operate and how you can draw benefits from it.

RETIREMENT SAVINGS

To provide social security for workers, the government set up a fund to which both the employer and employee contribute money. This fund, named the Employee Provident Fund (EPF) is administered by Central Board of Trustees constituted by the Central Government.

All establishments that employ 20 or more persons have to, as a mandate, offer PF benefits . The employee contributes 12 per cent of his pay (Basic plus Dearness Allowance to a ceiling of Rs 6,500 for most industries) and the employer makes an equal contribution to the fund.

The Employee Provident Fund Organisation, the provident fund institution of the Government of India, sees to it that the employer makes regular contributions and credits interest to the fund. The accumulated funds in the EPF account go to the employee on his retirement (or resignation). On switching jobs, the employee can either withdraw the PF amount or transfer the balance to his account with the new employer.

Early withdrawal is allowed buying property , wedding expenses, educational expense, medical and other admissible purposes. On a withdrawal request, the employee gets the accumulated sum in the fund along with the interest as a lump sum. PF contribution is deductible from the total taxable income (under Sec. 80C of the Income Tax Act). The receipt of the accumulated balance in the fund is also tax exempt.

If you are looking to add to your savings through your PF, you are welcome to make additional contributions (above the mandatory 12 per cent) to the fund.

PENSION AND INSURANCE BENEFITS

In addition to provident fund benefits, the memebers of an EPF scheme are entitled to some other benefits too. From the employer's PF contribution , 8.3 per cent actually goes towards a pension fund. Even better, the government also contributes 1.16 per cent of the salary (basic plus DA with ceiling of Rs 6,500) towards pension fund for employees (those working with private establishments also covered).

On retirement (post 58 years), the employee becomes eligible to receive pension. The pension amount, however, is not just the accumulated amount in the pension fund - it is calculated on the basis of pensionable salary and the employee's years of service.

Further, if the member of an EPF scheme dies while in service, his family is eligible for benefits under a life insurance policy (under Employee's Deposit Linked Insurance Scheme, or EDLI). Every employer has to mandatorily make a contribution (0.5 per cent of basic plus DA) to the Provident Fund authorities to provide for life insurance of his workers. The ceiling for death benefit under EDLI is Rs 1.3 lakh.

An employer can, however, choose to take up a group insurance policy with a private insurer in the place of the EDLI scheme . Here however, the employer should give a higher sum assured to the employee.

PUBLIC PROVIDENT FUND

A Public Provident Fund scheme is different from the EPF scheme of your employer. A public provident fund is run by the Central Government of India and is a fixed income savings option for the public in general. People who are already contributing to PF schemes or are self-employed can invest in PPF.

A PPF account can be opened at any nationalised bank and some post offices. The current interest on PPF account is 8 per cent