Sooner or later we all have to start thinking about retirement: both emotionally – ah, imagine the things you could do with all that free time – and financially – how will you fund your hobby of gourmet baking or travelling the world in a hot air balloon? When we speak of retirement planning in India, there’s the big honcho of financial planning to contend with: EPF schemes provided by India’s Employees’ Provident Fund Organisation. You may better know these schemes by their ever-present abbreviations: EPF, EPS, and EDLI. Yum.
Strap in, we’re going to tell you everything you need to know about EPF schemes today!
Key Takeaways
- EPS schemes are put in place to safeguard the financial interests of employees after they retire.
- There are three kinds of EPS schemes: Employees’ Provident Funds, Employees’ Pension Schemes, and Employee Deposit Linked Insurance schemes.
- Each of these schemes vary in terms of the responsibility born by the employer and the employee; they also safeguard the employee’s interest in different ways.
- EPS schemes provide a crucial service by making retirement planning mandatory for EPFO members: this ensures that when retirement comes knocking and their earning potential and income sources change drastically, they have a robust safety net in place.
What are the different kinds of EPF schemes?
EPF schemes have been put in place by the EPFO, or the Employees’ Provident Fund Organisation. This is an organisation overseen by the Ministry of Labour and Employment, and is essentially responsible for looking out for the financial interests of employees in India. More specifically, they are here to ensure that you are financially stable and well-taken care of after you retire.
To this end, the EPFO offers three kinds of EPF schemes:
- The EPF, or the Employees’ Provident Fund Scheme, launched in 1952.
- The EPS, or the Employees’ Pension Scheme, launched in 1995.
- The EDLI, or the Employees Deposit Linked Insurance Scheme.
How does an Employees Provident Fund scheme work?
The Employees’ Provident Fund scheme 1952 is designed to provide support after retirement to employees across a number of sectors in India. It is mandatory for employees to enroll in the EPF scheme 1952 to ensure that their financial interests are safeguarded when they retire: it essentially works as a kind of mandatory saving program for employees.
Employees’ Provident Fund scheme 1952 also offers important benefits in the face of unforeseen events such as accidents, premature retirement for a number of reasons, and even the shutting down of the firm. These come into effect once your services to your employer come to an end.
The key feature of an EPF scheme is that while you contribute a portion of your salary to your fund, your employer must also contribute the same amount to your fund. This means all your contributions to your EPF scheme are automatically doubled thanks to your employer! Other benefits of EPF schemes include:
- It’s a great way to save money in the long-term.
- You are not making single lump-sum investments like you would in an FD, for instances. Money is usually automatically deducted from your monthly salary. This is a classic case of every penny counts: while you may not notice this bit of money you put away every month, it can really add up over the course of your working life.
- EPF schemes can come to your aid in the event of financial emergencies.
- Most importantly, EPF schemes can help you plan for your retirement, when your earning potential changes dramatically, and financial stability becomes increasingly important for a number of reasons.
EPF schemes are currently earning interest at a rate of 8.10%.
How does an Employee Pension Scheme work?
Like the Employees’ Provident Fund scheme 1952, the Employee Pension Scheme 1995 is also a social security program put in place by the EPFO. The EPS 95 pension scheme provides for people working in the organised sector, ensuring that they will be receiving a pension after they retire. There is one caveat: to qualify for the EPS 95 pension scheme, you have to have provided service for 10 years – although this does not have to necessarily be continuous.
With EPS schemes, both employees and the employer each put 12% of the employee’s salary in these funds. While the full amount of the employee’s contribution goes to their EPF, the employer’s contribution is divided into the EPF and the EPS: 8.33% goes to the EPS, while 3.67% goes to the EPF.
Benefits of the Employee Pension Scheme 1995 include:
- A regular pension once you retire at the age of 58 years, as long as you have provided service for 10 years.
- The ability to fully withdraw the amount of the EPS fund if you are not able to complete 10 years of service before you turn 58.
- An assured pension if you are injured or totally disabled during your service with your employer.
- Financial security for your family in case something happens to you: they become eligible for pension in your stead.
What is the difference between EPF and EPS?
You might find yourself wondering what exactly the difference between the two EPS schemes is, since they both allow you to plan for retirement. Here’s a handy table explaining the difference between the Employees’ Provident Fund scheme 1952 and Employees’ Pension Scheme 1995.
What is the factor being considered? | Employees’ Provident Fund (EPF) | Employees’ Pension Scheme (EPS) |
How much does the employee contribute? | 12% of employee’s monthly salary. | Nothing – they do not contribute to the EPS. |
How much does the employer contribute? | 3.67% of employee’s monthly salary. | 8.33% of the employee’s monthly salary. |
Who is eligible? | All employees are eligible. | Only employees whose salary comes up to Rs. 15,000 per month are eligible. |
How much interest is earned on the investment? | Interest rates are fixed by the government – it’s around 8.10% right now. Interest is calculated monthly and paid out at the end of every financial year. | No interest is earned. |
How much is the maximum contribution? | 12% of the salary. | 8.33% of the salary up to Rs. 15,000, that comes up to around Rs. 1,250. |
How is it taxed? | Interest earned by EPF accounts are exempt from tax as long as the contribution is not more than Rs. 2.5 lakhs in a year. If the contribution goes over this amount, the excess will be taxed.Further, if the EPF is withdrawn before 5 years, TDS at 10% applies.However, no taxation applies on the principal amount. | Pension as well as lump sum payouts are taxable. |
When can I withdraw the money? | After you turn 58 years old or if you have been unemployed for 60 days or more at a stretch. | You will start receiving pension after you turn 58 years old. |
Can I withdraw my money early? | Yes, for exceptional cases such as marriage, education of children, paying a loan back, purchasing a home, unemployment, and so on. | You may also opt for an early pension at 50 years of age.You may also make a lump sum withdrawal if you have turned 58 or have less than 10 years remaining in service, whichever comes first. |
How much can I withdraw prematurely? | The full amount in your EPF account may be withdrawn. | The amount you can withdraw depends on how many years of service you have under your belt. |
Are there any 80C tax deductions? | Yes, you can claim deductions on upto Rs. 1.5 lakhs of your own employee contribution. | No – there is no employee contribution involved. |
Did You Know?
In 2020, Indians held nearly 14 trillion rupees in employees’ provident funds. And this amount grew from 2019!
Not Just EPFs and Pensions: EPFO Insurance Scheme
The Employees’ Deposit Linked Insurance EPF scheme also comes under the aegis of EPFO. The EPFO insurance scheme is essentially designed to ensure that the family members of employees have access to financial assistance and support in case of the employee’s death. All employees are automatically eligible, and the insurance cover provided under the EPFO insurance scheme depends on the employee’s salary in the last 12 months before their death.
Like the EPS scheme, employees do not contribute to EDLI schemes; employers contribute 0.5% of the employee’s monthly salary to the scheme every month.
Some important features of the EPFO insurance scheme include:
- Insurance claims can be made by family members, legal heirs, and nominees of the insured employee.
- All EPFO members are automatically enrolled in the EPFO insurance scheme.
- However, the employee is only covered by EDLI as long they remain active members of the EPF. Once they leave the service of an EPFO registered company, they will no longer qualify for the EPFO insurance scheme.
- Unlike the EPS, there is no minimum service time period for eligibility to the scheme.
- Employers make contribution to the EDLI scheme and cannot take any fees from employees to do so.
- The claim amount under the EPFO insurance scheme can go up to 35 times the employee’s monthly salary in the last 12 months – up to a maximum of Rs. 7 lakh.
Word to Remember
Retirement Planning: EPF schemes are a central aspect of planning for retirement, which is when our earning potentials are subject to drastic change.
Conclusion
EPF schemes designed by EPFO exist to ensure that all employees are financially taken care of after their retirement – this way, employers cannot put the full onus of retirement planning on the employee alone.
FAQs
EPF refers to the Employees’ Provident Fund Scheme 1952.
EPS stands for the Employee Pension Scheme 1995.
EDLI stands for Employees’ Deposit Linked Insurance, and refers to the EPFO insurance scheme.
Read more about Form 31 for EPF withdrawal.