The Employees’ Provident Funds Act Of India , An Employee’S Social Security

INTRODUCTION

In an initiative for a welfare scheme brought into force in order to secure the employees, the government of India had implemented The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (hereinafter referred to as “the Act”).

The aim of the Act was to ensure financial stability for employees in their retirement years, offering both savings and investment opportunities.

The Act is applicable to every factory or industry mentioned in Schedule 1 of the Act, wherein 20 or more persons are employed or to any other establishment which the Central Government specifies by notification in the official Gazette, even when the number of employees is less than 20, provided they earn a salary up to Rs. 15,000 per month.

THE ACT

Under the said Act, both the employee and the employer contribute a certain percentage of the employee’s monthly salary to a retirement savings fund. This amount accumulates with interest over time and is available to the employee upon retirement or under certain specific conditions, such as for purchasing a house, medical emergencies, or educational purposes.

The Employee Provident Fund (EPF) contribution is a percentage of an employee’s basic salary and dearness allowance (if applicable). Typically, both the employee and employer contribute 12% of the basic salary each to the EPF. However, the contribution rate may vary based on company policies and agreements made between the employee and employer.

The employee contributes 12% of their basic salary and dearness allowance (DA) to the EPF, while the employer also contributes 12% of the basic salary.

However, 8.33% of the employer’s share goes to the Employees’ Pension Scheme (EPS), while the remaining 3.67% is credited to the EPF.

For employees whose monthly salary exceeds Rs. 15,000, they can opt to contribute a higher amount, but the statutory limit remains Rs. 15,000 for compulsory contribution unless the employer agrees to a higher contribution.

It’s mandatory for all establishments to make EPF payment online. EPFO has a tie-up arrangement with some banks to collect EPFO dues and the participating banks are SBI, PNB, Indian Bank, Union Bank of India, Bank of Baroda, HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank.

The EPF balance grows at an interest rate set by the government, which has been around 8% to 8.5% per annum in recent years. This interest is credited annually to the account and is tax-free. As contributions made to the EPF are eligible for tax deductions under Section 80C of the Income Tax Act, the interest earned and the maturity amount are also tax-free provided the employee has been in continuous service for at least five years.

EPF funds can be withdrawn at the time of retirement (typically at 58 years), resignation, or termination of employment. If an employee leaves their job or is terminated, they may also withdraw the EPF balance. However, the withdrawal should typically happen after 2 months of leaving the job. Additionally, if the employee has worked for less than 5 years, the withdrawn amount will be subject to tax.

Partial withdrawals are permitted under specific circumstances like home purchase, loan repayment, medical emergencies, or education.

In a recent development, with effect from June 14, 2024, where an employer makes default in the payment of any contribution to the employees’ deposit linked insurance fund, employees’ pension fund, employees provident fund, or in the requisite transfer of accumulations or in the payment of any charges payable under the applicable laws, damages may be imposed at the rate of 1% of the arrears of contribution per month or part thereof.

INTERNATIONAL WORKERS AND EPF

For international employees working in India, to whom the Provident Fund Act applies (such as establishment having 20 or more employees) would be required to register themselves under the Provident Fund Act.

The international workers (except excluded employees) are required to contribute 12% of their salaries (not subject to any cap) to the Indian Provident Fund scheme. The exemption from making contributions for employees earning salary in excess of Rs.6, 500 per month does not apply to international workers. Additionally, the employers are also compulsorily to pay an equal amount, i.e., 12 percent of salary as their contribution to the scheme.

Further the EPF shall be applicable to total salary irrespective of whether the salary is remunerated in India or outside India, split payroll, or multiple country sources.

Certain employees with whom India have signed the Social Security Agreement (SSA) are exempted from payment of provident funds. Employees such as excluded employees, detached employee are exempted from making contribution under the EPF Act.

In terms of withdrawal of EPF contribution international Workers form Non-SSA Countries are eligible for full withdrawal of their PF accumulations, after they attain the age of 58 years, provided they have ceased to be in employment of an EPF covered establishment.

CONCLUSION

The Employee Provident Fund (EPF) is a powerful financial tool for ensuring a secure retirement. It benefits employees by providing a disciplined savings mechanism that encourages long-term financial planning, while offering attractive interest rates and tax exemptions.

With the growing awareness of financial literacy in India, the EPF system is becoming an increasingly important pillar of financial security, helping employees plan for their future while enjoying tax benefits and guaranteed returns.