Employees Provident Fund (EPF) – The best choice for a Salaried person

Employees Provident Fund (EPF) – The best choice for a Salaried person

Employees provident fund (EPF) is similar to the PPF except that it is available only to salaried employees. PPF is voluntary to invest in while EPF is mandatory, if your basic salary is upto Rs.15000/-. Above Rs.15000/- EPF is optional.


The Government encourages people to save some part of their salary in their employment years. The accumulated amount can be very useful during the person’s retirement years.

EPF is a scheme that most of us will encounter in our working lives and hence it is important to know how it works.

Let us understand the EPF concept.

In EPF, the employer deducts 12% of the employees actual salary (i.e. Basic + Dearness allowance) and also contributes a certain amount to the fund. The employers contribution can be 12% of the actual salary (basic + dearness allowance) or 12% upto a maximum of Rs 15000/-.

 For e.g. when Basic + DA is less than Rs.15000/-.

For e.g. If the salary is Rs.8000/-, then your EPF contribution is Rs.860/- and so is your employers contribution.

Out of the 12% of the employers contribution, 8.33% (8000*8.33/100) – Rs.666/- will be deposited in the Employees pension scheme (EPS) and the remaining 3.67% (8000*3.67/100) – Rs.294/- will be added to your EPF account.

Irrespective of how much your salary is, the contribution to EPS will be limited to a maximum of Rs.1250/- i.e. 8.33% of Rs.15000/-.

It is important to note that a person joining employment on or after September 2014 and earning a Basic Salary + DA above Rs.15000/-, will not be eligible for the EPS scheme. In this case, the entire 12% of the employers contribution will be deposited in their EPF account.

Some important facts about EPF –

  1. The amount deducted from your salary for EPF qualifies for tax deduction under section 80 C. Please note that you get tax deduction only for your part.
  2. You can withdraw your EPF money only at the time of your retirement or in the case of a medical emergency or unemployment, for a period of more than two months.
  3. In times of shifting your job, you can provide your EPF details to your new employer and complete the formalities. The transfer process can take around a month or more.
  4. After 5 years of having an EPF account, the amount you receive will be tax free.
  5. The interest rate offered on EPF is compounded annually and can vary every year, depending on the government’s decision.
  6. You cannot make any lump sum payments in your EPF account.
  7. Only companies which have 20 or more employees can have an EPF scheme.
  8. Nobody can claim the amount in your account except you. There is no time frame for claiming the amount but if your account is dormant for more than 36 months, then you will not receive interest.

Advantages of EPF

  1. The amount contributed by you under EPF is eligible for tax deductions under section 80C, upto a limit of Rs.150,000/-.
  2. You don’t have to open an EPF account, your employer has to do it for you.
  3. On closing your account, the amount will be deposited directly in your bank account within 3 months.
  4. No one can claim the money except you. Only in case of death, the amount is handed to the nominee.

Disadvantages of EPF

  1. You cannot withdraw the amount except in the case of emergencies listed.
  2. If you close your EPF account and withdraw the money before 5 years, you will pay tax on the amount received.
  3. It is not a liquid investment. It takes around 2-3 months to get your money after closing the account.

Finally, EPF is one the most sound and secure ways of saving a good amount of money for your retirement.

Please read our earlier article on Fixed Deposit.

To know more Please click here Investment in India



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