EPF: Why should you prefer an EPF-paying firm as an employer? Know the reasons
Employees' Provident Fund, or EPF, is the first employees protection scheme that was legislated by a young nation in 1952. Since then it has truned into a most trusted and potent employee welfare schemes that are offered to any employee in India.
Kolkata: It is a common tragedy that though an average person stops earning when he/she is 58 or 60, the trail of expenditure never stops. In fact, it can even rise if the person suffers from ill health. So how does he/she plan to defray his/her living cost? Employees’ Provident Fund, or EPF, is one of the fundamental social safety nets that has been designed for an employee and take care of his/her expenses after retirement.
Let's see how EPF helps an employee at the time of retirement. It consists of two part -- one makes a one-time lumpsum payment to the retiree. Two, another part funds a monthly pension throughout the life of the employee and even after expirt for the spouse. The amount in the EPF corpus depends on long-term compounding that takes place throughout the working life of an employee. If it is assumed that a person starts working at 25 and retires at 60, money will accumulate in the EPF for the entire period, that is 35 years.
Two significant benefits
There are two significant points about the EPF money. One, it enjoys a sovereign guarantee and, therefore, both the capital and interest enjoy the highest degree of safety. Two, the corpus and the interest that accumulate in the EPF account is free from Income Tax till a certain limit. This limit adequately covers a very big share of the employees in India.
Income taxes are levied on EPF if annual contributions from employee is higher than Rs 2.5 lakh (Rs 5 lakh for govt employees). Taxes are also charged if the employer's contribution to EPF, NPS and superannuation exceeds Rs 7.5 lakh a year.
How is EPF corpus built
Every month a fixed contribution that depends on the aount of salary an employee gets is dedcuted from the salary of an individual and is put into the EPF account of an employee. As much as 12% share of the basic salary and DA (Dearness Allowance) is taken from the employee’s salary every month and channellised in EPF account. As matching amount is taken from the employer as well but 8.33% of it is deposited in the account from whcih the pension will be paid after retirement. The other part (12% - 8.33% = 3.67%) is put in the EPF account.
The formula for deductions is laid down by the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, which extends to the entire country. Moreover, every year, the EPFO announces a rate of interest which is paid to the EPF account. For the past three years, this rate has been 8.25% which is the highest among all guaranteed interests paid in sovereign-guaranteed debt instruments such as senior citizens savings scheme.
What can EPF create for you
Let's take the example of a youngster who gets at 23. Let this person retire at the age of 58. Now let's make a few assumptions. This person starts with a basic salary of Rs 10,000. He/she gets an average increment of 5% throughout the working life. The minimum of 12% is deducted from his salary every month. Every year, the govt announces a 8.25% interest on the accumulated corpus in the EPF.
Now, with the above assumptions, an online EPF calculator will tell you that the amount in the EPF will come to Rs 58,56,851 or Rs 58.56 lakh. We have also that the pay hike will be 5%, more or less about the annual inflation rate in the country over the past few years. Therefore, all other factors remaining cosntant, an employer with EPF facilities is always preferable for any employee to one without EPF facilities.