My sister Devyani worked for four years in an organization. During her employment, her EPF account was created and regularly deductions were made from her salary and deposited into her account. However, she left this organization and joined another one after a gap of two months four years ago. In the new organization, no deductions were made from her salary for PF. This was because of the rule that if basic salary is more than Rs. 15,000 and deduction for PF is not mandatory. Thereby, without any doubt PPF can turn out to be a good option.
A few days back when she inquired about her EPF account with EPFO, she learnt that her account has become dormant. It is after this incident that I learned that EPF accounts could become inoperative if you are not making contributions in it regularly.
Origin of PF
Employee Provident Fund or EPF was started back in 1952 to help workers build a corpus fund for their retirement. Initially, only coal workers were covered under its purview. However, owing to its success, it was later on extended for all industries. Currently, any organization with 20 or more employees is required to get itself registered with EPFO for EPF and deduct the same for its employees.
Importance of PF
The success of EPF was due to the benefits provided by it to employees. Some of the key points which proves how vital PF is for employees are as follows:
- Pension: In the EPF account, both employee and employer contribute 12% of employee’s salary. However, 8.33% of the employer’s contribution is directed towards the Employees Pension Scheme. Continuous contributory membership of 10 years ensures lifelong pension as per the Employees Pension Scheme 1995.
- Premature Withdrawal: The strong recommendation from EPFO is not to make any premature withdrawal from the EPF account. However, after it allows premature withdrawal after 5 years of contributory membership in case of pre-specified scenarios such as medical treatment, payment of the home loan, education, etc. For example, up to 50% of an employee’s contribution can be withdrawn for education or marriage, while upto 90% PF accumulated balance can be withdrawn for payment of a home loan.
- High Returns: Current rate of interest on EPF is 8.50%. However, the effective rate of interest is much higher, considering the compounding effect as it applies to the interest calculation of EPF. Plus, the EPFO invests 5-15% in ETFs (Exchange Traded Funds) from its investable deposits, while 45-50% of the funds are invested in government securities. The point is, the rate of interest on EPF is likely to be higher than many safe investment options for a long time to come.
- Tax Benefits: The employee’s contribution to EPF, the interest earned on EPF account are available for deduction under Section 80C of Income Tax Act. In addition, the EPF withdrawals made after 5 years of membership are also exempt from income tax.
- Insurance: EPFO provides insurance cover under the Employee Deposit Linked Insurance (EDLI) Scheme. A year ago, the minimum insurance limit was enhanced to Rs. 2.5 lakhs. The maximum limit is Rs. 6 lakhs. The nominees receive the lump sum amount in the event of the death of the insurer.
Considering these benefits and the recent experience, my sister had, I recommend you to continue your EPF account without disruption. An inoperative EPF account can be received only when the employer starts deducting EPF. However, the PF account continues to earn interest even when no contribution is made for years.
Summary
The Central Government initiated the EPF or Employee Provident Fund with the objective of providing a corpus fund to workers for their retirement. It started by covering coal workers, and after a few decades, it became applicable to all industries. Now, every organization with 20 or more employees needs to register under EPF and deduct the same for its employees.
As an EPF account holder, your contribution in the PF account along with interest earned on it is applicable for deduction under Section 80C. Besides the premature withdrawal after 5 years of membership is also tax free. Secondly, ten years of continuous contributory membership ensures life-long pension under the Employees Pension Scheme 1995. Not to forget the insurance benefit provided by the EPFO in which, the lump sum amount is transferred to the nominee in case of death of the insured. The minimum assurance amount is Rs. 2.5 lakhs while the maximum amount is Rs. 6 lakhs.
As per EPF rule, deduction of PF is not mandatory if the basic salary is above Rs. 15,000. Thus, if after having some years of contributory PF you change the organization which do not deduct PF for employees above Rs. 15,000, then even in that case you will continue to earn interest on your PF account.