Employees’ Provident Fund Act, 1952
The Directive Principles of State Policy enshrined in the Constitution of India aims at ensuring socio-economic justice to the people and in establishing a Welfare State. Private sector Employees’ who retired found themselves in trouble to earn a normal livelihood.
The government passed a legislation to introduce a long-term savings scheme that would support them in retirement or superannuation. This gave them a life of dignity and a strong social security cover. This legislation is the Employees’ Provident Fund & Miscellaneous Provisions Act, 1952.
As a follow-up, in the year 1976, the government introduced the Employees’ Deposit Linked Insurance Scheme (EDLI) as a part of the EPF Act. This paved the way for the nominee of the policy to receive a lump-sum payment in the event of the death during the period of service, of the person insured.
To provide further security, in the year 1995 the government introduced the Employees’ Pension Scheme (EPS) to ensure more support.
Who the Act is Applicable to?
The Act applies to both the Employer and the Employee.
The EPF Act provides that any establishment having 20 or more Employees’ comes under the purview of the Act. However, even organizations with less than 20 Employees’ can opt to register for this scheme.
The Act mandates that all Employees’ who draw a salary (Basic wages) that is less than INR 15,000/- should become a member under the scheme. For those drawing more than INR 15,000/-, you are given the option to either join or not join as a member. However, once an employee drawing more than INR 15,000/- has become a member, he cannot opt-out of the scheme at a later date.
All the 3 Schemes, EPF, EPS & EDLI are bundled as one package and there is no option to choose as per one’s discretion.
How to contribute?
Both the Employer and the Employee have to mutually contribute to the EPF. Employees’ contribute 12% of their basic salary towards this fund and the employer contributes an equal amount. The entire portion of the contribution of the Employee is allocated to the EPF A/c. This accumulated fund earns interest at a specific rate as declared by the government from time to time.
The Employer also contributes 12% out of which 8.33% of the salary is allocated to the Employees’ Pension Fund (subject to a maximum of INR1250/-) and the remaining 3.67% is allocated to the EPF A/c. In addition to this, the employer also contributes to the Employee Deposit Linked Insurance Scheme. This is 0.50% of the basic pay subject to a minimum of INR 75/- per month per employee.
Apart from this, the employer has to contribute 0.50% of the basic towards the PF Administrative charges subject to a minimum of INR 75/- per month for a non-functional organization without any contributory member and INR 500/- for other establishments.
As mentioned earlier, the three schemes EPF, EPS, and EDLI are bundled schemes with no option to contribute separately as per our choice.
Therefore, we must understand the key functions of the 3 schemes.
Employees’ Provident Fund
This is the main ingredient of the EPF Act 1952. The main purpose of this enactment is to provide security to the employee on retirement. The Employees’ Provident Fund Organization (EPFO) controls this scheme.
In this scheme, the Employee and Employer contribute to the scheme. The Employee contributes 12% of salary (Basic wages) and the Employer contributes 3.67% of basic salary from the 12% that he contributes. The Employees’ Pension Scheme and the Employees’ Deposit Link Insurance scheme share the balance 8.67%.
The EPF scheme is exempt under the Income-tax Act. This is the EEE exemption. The First E indicates that this investment is exempt from tax; the Second E indicates that the interest earned on this investment is exempt from tax and the Third E indicates that the income generated from this investment will not be taxable at the time of withdrawal.
The Finance Act, 2020, has modified this rule. The rule now states that if the funds contributed by the employer in any of the schemes go beyond 7.50 lakhs, then the interest income on the incremental contribution is taxable.
Penalty for late payment /non-payment
The Act mandates that the employer has to remit his part of the contribution along with the employee portion on or before the 15th day of every month without fail. In case of default of payment, the employer is liable to pay U/s.7Q of the Act, simple interest at the rate of 12% per annum for each day of the default.
Under Section 14B of the Act, late filing of EPF Challan and contribution will attract the following penalties.
5% interest p.a for a delay of upto 2 months
10% interest p.a for a delay of 2-4 months
15% interest p.a for a delay of 4-6 months
25% interest p.a for a delay of more than 6 months
The PF a/c’s of members will be credited the interest once the penal dues are realized and the employer will be charged penal interest to cover the interest dues and also has to pay a penalty in case the employer is declared bankrupt. This indicates that the EPF dues are more important than any other debts or dues. Non-payment of dues could also attract arrest proceedings. The EPFO has the right to attach the bank a/c of the employer for non-payment of these dues.
Interest Rate on EPF
The interest rate for EPF contributions was 8.5% for the fiscal year 2020-21 and this remains unchanged for the fiscal year 2021-22 also. The interest calculation depends on the monthly running balance and the rate announced by the government.
Employees’ Pension Scheme (EPS)
The Employees’ Pension Scheme is a social security scheme launched in the year 1995 by the Employees’ Provident Fund Organization. The scheme provides a pension to an employee of the organized sector after retirement at the age of 58. This is subject to the employee having being employed for at least 10 years (this need not be continuous years of service).
The following are the criteria to become eligible for the scheme.
- The employee should be a member of EPFO
- He should have completed 10 years of service
- The employee should be 58 years of age
The amount of premium is arrived at using the following computation:
Month Pension = Pensionable service x Pensionable salary /70
The maximum pensionable salary is INR15000/- per month
EPS funds don’t generate any interest.
Employees’ Deposit Linked Insurance (EDLI)
Introduced in the year 1976, the EDLI scheme provides the nominee a lump-sum amount in the event of the death of the person insured during the period of service.
Eligibility and other criteria
- All EPF members get the benefit of the EDLI scheme
- The plan is a term plan and the sum insured is variable as it depends on the remuneration of the person insured.
- The Employer pays the premium amount.
- The minimum assurance benefit for the scheme is INR 2.5 lakhs and the maximum is capped at INR 7 lakhs.
The Employees’ Provident Fund Act, 1952, the Employees’ Deposit Linked Insurance Scheme, 1976, and the Employees’ Pension Scheme, 1995 provide a strong social security cover to Employees’ in the private sector. These are a means of supporting the livelihood of such Employees’ once they retire from service. They are one among the pillars of a society that believes in being identified as a Welfare State.
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