How is EPF calculated on Salary and does it have any tax benefit?

What is EPF? 

The Employee Provident Fund, implemented in India in 1952, is a retirement benefit program where both the employer and the employee make monthly contributions during the employee's active employment period. The accumulated funds in the Employees' Provident Fund (EPF) can be withdrawn under certain circumstances. Partial withdrawals are allowed for specific purposes such as education, home loans, marriage, or in case of medical emergencies. Employees can withdraw the entire amount upon retirement. EPF payments are typically a percentage of Basic Salary and Dearness Allowance. 

EPFO and UAN

Employees' Provident Fund (EPF) in India is governed by the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. EPF is administered by the Employees' Provident Fund Organization (EPFO), which operates under the Ministry of Labour and Employment, Government of India. The EPFO is responsible for overseeing the implementation and management of the EPF scheme, ensuring compliance with regulations, and facilitating the collection and distribution of contributions from both employers and employees.

The Universal Account Number (UAN) is a unique identification number assigned to an employee covered under India's EPF scheme. The UAN is issued by the EPFO to streamline the management of provident fund accounts and ensure portability. The UAN remains constant throughout an employee's career, even if they change jobs. Employees can obtain their UAN from their employers, and it's typically mentioned on the salary slips or can be obtained directly from the EPFO website. The UAN is an essential tool for accessing and managing EPF accounts conveniently. Click here to be redirected to the website.

EPF calculation on Salary

As an employer, any organisation employing 20 or more people, is required to register itself under the EPF Act. The employer is then required to contribute to the employee EPF. The minimum employer contribution is to be 12% of (Basic Salary+Dearness Allowance). The Employee then matches the amount of 12% of the basic salary and DA for their contribution. The entity usually deducts both of these amounts before crediting your salary and makes the payment altogether. 

Out of the 12% employer contribution to the EPF Account, 8.33% of Basic Salary and DA is a contribution to the Employee Pension Scheme and the balance 3.67% is the contribution to the EPF account.

EPF Interest

The entire EPF corpus is invested in government securities, bonds, and other approved instruments, and the interest earned on these investments contributes to the growth of the EPF savings. The government ensures that the EPFO manages the fund efficiently to safeguard the interests of the contributing employees.

The interest rate is determined by EPFO and is typically announced annually. For the FY23-24, the EPF Interest rate is 8.25%. This interest is calculated on the monthly running balance and is credited to the EPF accounts at the end of the financial year.

Tax Benefits of EPF

• Employee's contribution: to the EPF is eligible for a tax deduction under Section 80C of the Income Tax Act, subject to the maximum limit of Rs 1,50,000.
• Employer's Contribution: to the EPF is not included in the Employee's taxable salary under the Income Tax Act. 
• Employer: can claim deductions for their contribution to the Employer's PF Account. It is an eligible tax deduction under the Income Tax Act. 
• Exemption on Interest and Withdrawal: Under Section 10 of the Income Tax Act the interest earned on the PF and withdrawal of the PF shall be exempt in certain cases. Example: If the contribution is in a Recognised Provident Fund, interest income up to 9.5% per annum is exempt and if it is a Statutory Provident Fund the entire interest amount and lumpsum withdrawal amount are exempt from tax. 

Example:

Let's say your salary is Rs 20,000 per month and you have joined work in April 2023. 

The calculation for EPF monthly will be as follows:

3.67% of Rs 20000 = Rs 734
12% of Rs 20000 = Rs 2400

8.25% interest per annum = 0.6875% per month.

And so on. The entire interest amount is credited to the EPF Account only on the last day of the financial year and will therefore be considered in the opening balance for the interest calculation in the next year. 

The EPF provides a financial safety net by allowing individuals to access their savings when needed, making it a valuable resource during various life stages.