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How Does Employee Provident Fund (EPF) Work?

Personal Finance

An essential financial benefit that all of us obtain while getting employed with any public or private sector organisation in India is the EPF Account. First launched in 1952, the employee provident fund has been an integral part of employee benefits. From the most junior employee to the CEO – every employee of an organisation gets benefits from EPF.

All organisations with 20 or more employees need to register for EPFO mandatorily. However, organisations with less than 20 employees can also voluntarily join EPFO and provide their employees EPF account benefits.

But how does it work? What happens to the amount deducted from your salary every month? We will take a look at all this and more in this article.

But first, let us take a brief look at what an employee provident fund is and what are its benefits.

What is an Employee Provident Fund?

EPF is a scheme under the Employees’ Provident Funds and Miscellaneous Act, 1952 where-in both the employee and the employer each contribute 12% of the employee’s basic salary and dearness allowance toward an employee’s EPF Account. This money earns a fixed rate of return which changes from time to time. The current interest rate on EPF is 8.1% (as of 22nd November 2022).

EPF is promoted by a non-constitutional body named the Employees’ Provident Fund Organisation (EPFO). The Ministry of Labour and Employment, Government of India, governs this organisation. All schemes of this organisation cover Indian workers as well as International workers from countries with whom EPFO has signed a bilateral agreement.

Your contributions towards EPF are eligible for deduction under Section 80C of the Income Tax Act. Earnings generated from EPF contributions are also eligible for deductions, up to an amount of ₹ 1.5 Lakhs.

How Does the Employee Provident Fund Work?

EPF primarily works through a three-step process:

1. EPF is deducted from your salary

As mentioned earlier, 12% of your basic salary is deducted as EPF every month. This appears in your salary slip. This is a compulsory deduction. 8.33% of the deduction goes towards Employee Pension Scheme or EPS and the remaining 3.67% is deposited into EPF.

2. Your employer matches this amount

So, while you contribute 12%, your employer also contributes the same amount. Employers’ 12% is also treated in the same way – 8.33% toward EPS and 3.67% toward EPF. Hence, effectively, you compulsorily save 24% of your basic salary every month.

While the amount may look small on the salary slip, when accumulated over the years along with interest, this amount can grow up to a handsome amount, which may come useful for major expenditures such as retirement, children’s higher education, wedding, and others.

3. All EPF contributions earn interest

All EPF contributions across the country are pooled together and invested by a trust. This fund earns interest at a rate decided by the government. In general, the interest rate varies between 8% to 12%. EPF balance grows at a compound rate as in you earn interest on interest. This helps you to accumulate a significant amount every year.

EPF Withdrawal

EPF balance can be fully withdrawn in three scenarios:

  1. On retirement
  2. While switching your job from one organisation.
  3. When unemployed or in between jobs. In this case, a person should be without a job for at least 2 months. 

However, partial EPF balance withdrawal is allowed under certain circumstances, for example:

  • Higher education
  • Wedding
  • Constructing or purchasing a house
  • Repayment of home loan
  • Renovation of home

How to Withdraw EPF?

The withdrawal process of EPF balance is quite simple and can be done online or offline.

Online process:

  1. Register for a Universal Account Number (UAN) on the EPFO portal. This is your unique login through which you can access all your EPF details. Ensure to use an active mobile number while creating the UAN.
  2. Link your UAN to your Aadhar.
  3. Verify your KYC details on the portal and proceed as per instructions. You will need to input your PAN details and bank account details along with the IFSC code.

Offline process:

  1. Fill up the composite claim form.
  2. Get it attested by your previous employer.
  3. Submit the form at the EPFO office under whose jurisdiction your EPF is collected.

Transferring Employee Provident Fund

We discussed the process of withdrawal of EPF. But what happens if you leave an organisation and join another one? You have to transfer your EPF balance from your old employer to your new employer.

The process of transfer is quite simple. It can be done by your new employer. You simply need to fill up a few forms and submit them to your new employer. The process will be handled by them. These forms are usually a part of the joining kit. However, if they are not, you can ask your employer about them.

You can also initiate the transfer process yourself. You will need your Universal Account Number (UAN) and simply follow these simple steps.

1. Log into the EPF member portal.

2. Go to Online Transfer Claims Portal and request an EPF transfer.

3. Select ‘Request for Transfer of Funds’ and input your previous employer details.

4. Herein you will need your old or new employer to authenticate it.

5. Once you submit your information, you will receive a PIN on your mobile.

6. You will be able to track your application using the tracking ID provided to you.

The EPFO website also has a grievance section. Hence, in case you have any issues with your withdrawal or transfer or any grievance against your employer, you can complain on the website itself.

The EPFO website also has a passbook section where-in they issue passbooks to all members. The passbook can help you keep a track of your EPF account balance and ensure your EPF is being deposited on time.

EPF, at the end of the day, is an immensely beneficial financial buffer. With multiple benefits, it is the “friend in need”.