Why does EPF take a bite out of your salary?  

Usually, young folks who receive their first salary credit after taking up a new job find that their actual take-home pay is much lower than what they thought they would get, compared to the CTC (Cost to Company) mentioned in their offer letter. One reason for this is the income tax deduction. But the other reason is the sum docked towards contribution to the EPF or Employees Provident Fund.  

What is EPF? 

The Employees Provident Fund is a compulsory retirement savings vehicle run by the Employees Provident Fund Organization (EPFO), which is under the Labour Ministry of the Government of India. A central law says that any organisation employing more than 20 people in India needs to register with the EPFO. Any new employees joining the organization are to be enrolled as members of the EPF. So, when you take up a job for the first time, you automatically become a member of EPF. Once enrolled, every month, a portion of your basic salary is deducted by your employer and sent to the EPF. The good part is that that your employer is also expected to contribute to your EPF kitty. Earlier, the EPF deduction also used to include a pension component. But employees who have joined work after September 1 2014 are not eligible for the pension scheme.   

Both employees and employers are supposed to contribute 12% of the basic salary to EPF. But the EPF caps the basic salary for this calculation at Rs 15000 per month. So it is mandatory for you and your employer to each contribute Rs 1800 per month to EPF. But some employers allow their employees to contribute 12% of their entire salary (not just basic) to the EPF and also offer to match it.  

Should I opt for the higher contribution? 

 There are pros and cons.  Opting for contributions on your full basic will mean more of your pay will be docked every month, leaving you with a lower take-home. But the money is going into a safe, government-backed vehicle and will earn high interest. If your employer offers to match your contribution that’s additional money you will be getting from your employer (but this could be included in your CTC).  

The EPF has been declaring interest at much higher rates than bank FDs so far. As a big bonus, this interest income is not taxed, unlike FD income which is taxed at your slab rate. If you are under the old tax regime, you can also deduct EPF contributions of upto Rs 1.5 lakh a year under section 80C while calculating taxable income. Your employer’s contribution also escapes the tax net. On the minus side though, the retorn on EPF is completely at the government’s discretion. EPF is not a flexible way to save and invest. You cannot opt out of contributions if short of money. Your money is locked in until you retire or quit your job. You can however withdraw your PF if you have a break between jobs.   

What happens to this money?  

Your monthly contributions to EPF are pooled with 6.4 crore crore other employees and invested in central and state government bonds, company bonds and to a limited extent in the stock market too. Every year, the EPF’s Board of Trustees takes stock of the surplus earned by the scheme after meeting expenses and recommends an interest rate to the Government. This interest, once approved by the government, is credited to your account based on your balance and contributions throughout the year. The interest rate declared for 2022-23 was 8.15%. Both the contributions and interest keep accumulating in your EPF account until you retire. You can withdraw upto 90% of your balance at 54 or the full amount after the age of 55.  

How do I know how much money I have in EPF?  

At the time of enrolment, every employee is allotted a Universal Account Number (UAN) to identify his or her account. Your PAN, Aadhar and bank details are linked to this number. Once the UAN is activated, you get monthly SMS updates on your employer remitting contribution into your. You can also send SMS to EPFO to know your balance in the EPF. You can download the UMANG app to access your account statements and passbook.   

What if I stop working? 

If you move from one organisation to another, the EPF allows you to port or take your EPF account with you. If you opt for this, your EPF balance will be transferred to the new employer, who will continue to contribute to it.  The EPF also allows you to withdraw your full balance if you quit working (and turn self-employed or run a start-up). You can withdraw 75% of your balance after 1 month of being unemployed and 100% of it after two months of being unemployed.  

Can I get loans from EPF?  

The EPF allows ‘advances’ or partial withdrawals from your account for very specific purposes. Once you take this advance you need not refund it. If you need money for medical treatment for yourself or parents you can take an advance. Advances can also be taken for constructing or renovating your home, your own wedding and the education of your children. But you will need to complete a minimum 5-7 years with EPF for the non-medical advances and provide proof of the purpose. 

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