WHAT IS PF? – PF MEANING, BENEFITS & RATE OF INTEREST

EPF stands for Employee Provident Fund that is a scheme for providing a monetary benefit to all salaried individuals after their retirement. The process is monitored by the Employee Provident Fund Organisation of India. Any organisation that has more than 20 employees must register with the EPFO.

What is PF?

In 1952, the PF (Provident Fund) or EPF scheme was introduced under the Employee’s Provident Fund and Miscellaneous Act. All the rules and regulations are defined by the Employee Provident Fund Organisation. The EPFO’s activities are managed by the Ministry of Labour and Employment.

In this process, the employer will collect an amount by deducting it from your monthly remuneration. As you start working in a firm, both you and the organisation contributes 12% of your basic remuneration into the EPF account. This salary includes any dearness allowance provided by the company. You will receive a fixed level of interest on this amount based on the rules set by the EPFO. The total amount that you receive along with the interest is tax exempted.

12% of the salary goes to the EPF account along with 3.67% from your company. The remaining 8.33% of the 12% is sent to the Employee Pension Scheme. In case your salary is above Rs 6500, the company can only contribute 8.33% of that amount to the EPS. The remaining balance amount is credited to your EPF account.

All individuals earning a salary of Rs 15,000 and above have to register under the EPF scheme.

You can withdraw the entire amount from the account after you retire or leave the organisation. In case of your unfortunate demise, your nominee or legal heir can withdraw this EPF amount.

Employer’s contribution to EPF

The minimum rate is 12% out of a salary of Rs 15,000 that is Rs 1800 per month. So, both the company and you will contribute Rs 1800 to the EPF scheme. Apart from this rate, the employer has to pay an additional amount of 0.5% towards the EDLI (Employees Deposit Linked Insurance Scheme) which is an insurance cover. Through this scheme, your nominee will receive a lump sum amount as death benefit after your demise.

There are administrative costs for EPF and EDLI that have to be borne by the employer. A charge of 1.1% for EDLI and 0.01% for EPF is contributed.

EPF rate of interest

The rate of interest for EPF was 8.55% for 2017-18 and has been increased to 8.65% for the financial year 2019. Even though the contributions are deposited on a monthly basis, the interest on these contributions is calculated yearly as per the rates defined by the government. But, the interest will only be collected for the EPF account balance and not for EPS funds.

The rate of interest is valid between the financial year of 2018 and 2019. When a financial year starts, you will have an opening balance in the EPF account that has been accumulated until that point. For the next financial year, the opening balance will be calculated as:

Opening balance + contributions that have accumulated monthly + interest for the previous opening balance along with the contributions

However, if no amount has been forwarded towards the EPF account for a period of 3 years continuously, the account becomes inactive. Retired employees will not receive interest on the amount collected in an inactive account.