What is Pension Contribution in the EPF Scheme?
In the Employees Provident Fund (EPF) scheme in India, a pension contribution is a critical component that directly affects an employee's financial security during retirement. The EPF is a comprehensive savings and retirement benefit scheme primarily designed for employees in the organized sector, managed by the Employees Provident Fund Organization (EPFO).
Contribution Rates
The employer contributes 12% of the employee's basic salary (and dearness allowance, if applicable) to the EPF. Out of this contribution, 8.33% goes towards the Employees Pension Scheme (EPS), and the remaining 3.67% is allocated to the employee's EPF account. These rates ensure a balanced allocation of funds towards both current and future needs.
Eligibility for Pension Contributions
To be eligible for EPS, employees must earn a basic salary of up to Rs. 15,000 per month. Those earning more than this limit will have their pension contribution capped at this maximum amount. Additionally, to qualify for a pension upon retirement, employees must have contributed to the EPS for at least 10 years.
Pension Benefits
The pension amount is determined based on the number of years of an employee's service and the average salary earned during the last 60 months of their tenure. This sum is payable on a monthly basis after retirement, providing a steady financial stream for the employee's post-employment years. Pension benefits can also be claimed by the employee’s family in the event of the employee's death.
Withdrawal and Reasons for Early Retirement
It is worth noting that if an employee withdraws their EPF balance before completing 10 years of service, they will not be eligible for pension benefits under the EPS. However, there are specific scenarios under which early withdrawal is permissible, such as sudden death, disability, or during a retrenchment period.
Benefits of the EPF Scheme
EPF allows for tax savings under Section 80C of the Income Tax Act, 1956, enabling employees to reduce their taxable income.
For those aiming for long-term investment goals, the EPF is an ideal choice for secure and potentially high-yielding savings.
The scheme provides financial security during retirement through a steady income stream.
EPF accounts can be merged and accessed through a single window using the Universal Account Number (UAN), making it convenient for job changes.
The funds in the EPF account are also utilized to provide a life insurance cover to employees, ensuring their financial safety.
EPF services can be accessed through the new UMANG app, enhancing accessibility for employees.
EPF Deductions
An employee's EPF contribution consists of a fixed percentage of their salary and dearness allowance, currently set at 12%. This contribution is split between the EPF and EPS, with 8.33% going to EPS and 3.67% to the EPF account. The employer's contribution is also mandatory, currently set at 12.05% of the employee's salary, which includes both EPF and EPS contributions. The breakdown is as follows:
12% of salary (basic DA) 8.33% to EPS 3.67% to EPF
Employer's contribution: 0.5% to EDLI administration cost, 1.1% to EPF, and 0.01% to EDLI administration cost, totaling 13.61%.
EPF Interest Rates
The interest rates for EPF are subject to annual adjustment, overseen by the central government and the Central Board of Trustees. For example, the interest rate in 2015-2016 was 8.8%, 8.65% in 2017-2018, and 8.55% in 2018-2019. These rates are applicable for the entire financial year, from April 1st to March 31st. The interest is calculated throughout the year but credited at the end of the financial year.