How to open an EPF account? Know its rules, eligibility and benefits
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How to open an EPF account? Know its rules, eligibility and benefits

The periodic labor force survey (PLFS- 2017-18) revealed that around 45% of the total labor force in India has an average monthly wage of less than Rs. 10,000. Employees’ Provident Fund Organization (EPFO) aims to provide financial assistance to such individuals for social security and retirement planning. A salaried individual can open such an EPF account for their employees. Employers are mandated to provide EPF account to all employees lying in this salary bracket.

Overview of EPF and EPF accounts

Every company operating in the organized sector has to follow the stipulated rules mandated by the government regarding Employee Provident Fund accounts –

●  Individuals with a salary of below Rs. 15,000 has to be provided with an EPF account from the employers’ side. Nonetheless, employees having a salary of more than Rs. 15,000 have the liberty of choosing whether to apply for such an account.

●  Companies having more than 20 permanent employees must provide an EPF account to its employees. However, organizations having a workforce of fewer than 20 individuals can choose to provide such complimentary benefits at their discretion.

●  Companies are bound to pay 12% of the total gross salary of an employee as a contribution towards the EPF account. Individuals have to pay an equal share towards the maintenance of this account as well.

●   In the case of businesses providing employers’ provident fund facilities to a total permanent workforce of fewer than 10 individuals, the contribution from both employers and employees is limited to 10%.

Any application for an Employees’ provident fund account has to be done via the supervising employer. Details regarding the same are generally present with the employing organization. Nonetheless, in special cases, form 11 stipulating declaration of the job in the respective company and form 2 providing all other associated details have to be furnished accordingly.

In case an employee goes through a job change, the new employer opens another such provident fund account in his/her name. In such cases, an individual can provide a universal account number or UAN to the new organization to link multiple such provident accounts via the same number.  This allows employees to keep track of the total percentage of income deposited.

There are several advantages of maintaining an EPF account, such as –

●  High interest rate

Interest rates payable on such provident accounts are higher than the ones provided on standard savings and fixed deposit accounts. As such deposits have to be maintained for an extended period, overall wealth creation is substantially higher.

This feature allows individuals to save money and make money at once without any hassles.

●  Risk-free and guaranteed

EPFO is an organization mandated by the central government of India, ensuring complete protection of the corpus. Such schemes are not market-linked either, thus, providing stable returns on such investment.

● Comprehensive planning for future

EPF accounts come with several restrictions on the withdrawal of funds before retirement. This restrains individuals from spending such deposited amounts during their employable years, and save enough to support themselves during times of no income. Also, the total amount saved up can be reflected by linking all such accounts through UAN number of an individual. This allows you to manage your money more effectively both in the present and future.

● Hedge against inflation

The interest rate against EPF accounts is determined by the government to promote the social wellbeing of residents.  Such rates can be adjusted as per government policies, to maximize returns for financial protection. To such an extent, the central government tries to keep interest rates on EPF higher than the prevailing inflation rate, to increase real wealth of citizens.

●  Tax-free

Contributions towards the EPF account by the employer are exempted from income tax under the Income Tax Act of 1963. Contributions by the employee are tax exempted up to a total of Rs. 1.5 Lakh per annum under the clause of income generated from other sources. It is a significant tax saving investment option under Section 80C. Note that, the funds available can be completely exempted from income tax liability if you access the funds after the minimum period of 5 years.

One major drawback of this investment tool is its lock-in period, as total corpus money can only be withdrawn on retirement. Alternatively, individuals can opt for fixed deposits, providing relatively similar interest rates with a reduced lock-in period and additional flexibility for withdrawal. Major financial institutions such as Bajaj Finance provide Fixed Deposits at interest rates of up to 8.70%, higher than the total interest on employees’ provident fund accounts.  It can prove to be a more stable investment option providing risk-free high returns for individuals.