Calculation Rules for Employee Provident Fund (EPF) and Employee Pension Scheme (EPS), 2022

About Employee Provident Fund (EPF)

Employees Provident Fund Scheme (EPF) comes under the purview of, 'The Employees' Provident Funds and Miscellaneous Provisions Act, 1952'. It is governed by the Employee Provident Fund Organization (EPFO), India. Every establishment that employs 20 people or more is covered under the EPF scheme, and under certain restrictions and exclusions, even organisations that employ less than 20 people are also covered.

In India, EPF is widely accepted by employees as one of the significant savings schemes for retirement purposes. As per this scheme, an employee, and the employer both have to pay a contribution towards the scheme. The employee on retirement gets the benefit in the form of the accumulated lumpsum amount comprising the self and employer's contribution with interest on both.

According to the regulations, an employee is deemed to be a non-eligible employee if their pay at the time of joining exceeds ₹15,000 per month. Employees who make less than ₹15000 per month are required to join the EPF as a member. However, if both the employee and the employer agree, an employee who is receiving pay over the specified maximum (currently ₹15,000) may join with approval from the Assistant PF Commissioner.

Employees often face a challenge in calculating the amount of provident fund and pension fund that goes into their savings and the amount of interest on the accumulated EPF amount.

This document explains the new formula for the calculation of EPF, the percentage of amount contributed to the pension fund and the calculation of the interest on the accumulated EPF amount (accumulated corpus).

About EPFO

EPFO is one of the world's largest Social Security Organisations with respect to its clientele and the volume of transactions undertaken.

The Employees' PF Organization (EPFO), which has offices in 138 different sites around the nation, aids the Central Board of Trustees. The Government of India's Ministry of Labour and Employment has administrative jurisdiction over the EPFO. Three schemes are operated by the Central Board of Trustees

1. Employee Provident Fund Scheme (EPF) 1952

2. Employee Pension Scheme (EPS) 1995

3. Insurance Scheme 1976

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Contributions towards the EPF Scheme

Employer contributions are equal to 12% of base pay plus dearness allowance (only basic pay in case of zero dearness allowance). Additionally, the employee is required to pay a similar amount. According to EPFO regulations, the contribution rate for both the employee and the employer is capped at 10% for enterprises with less than 20 workers or those that satisfy certain additional requirements.

8.33% of the employer's contribution will be diverted to the Employees' Pension Scheme, but the amount is based on ₹15,000 instead. Therefore, the monthly diversion by employers into EPS is ₹1,250 for each employee whose base pay is ₹15,000 or higher. If the basic pay is less than ₹15000, 8.33% of the entire sum will be paid into the EPS. The remaining amount will remain in the EPF scheme.

Voluntarily, employees can pay higher contributions above the statutory threshold of 12% of basic pay, this contribution goes towards the Voluntary Provident Fund (VPF) which earns tax-free interest. Employers are not bound to match the voluntary contribution.

Methods for Calculating EPF and EPS Contributions

The calculation of the EPF contribution can be understood under the following two scenarios.

1st Scenario - When the sum of an employee's basic pay and dearness allowance (DA) is less than or equal to ₹15000.

The employee's contribution will be calculated as 12% of the sum of basic pay and dearness allowance while the employer's contribution of 12% of the sum of basic pay and dearness allowance is further diverted to the following two categories-

1. 3.67% into the employee provident fund (EPF)

2. 8.33% into the employee pension scheme (EPS)
   

2nd Scenario - When the sum of an employee's basic pay and dearness allowance (DA) is above the threshold limit of ₹15000.

In the second scenario, there are two methods given to calculate the EPF contribution share by the employer and the employee. However, the first method of calculation given below is most widely used by employers.

1. Method #1 - Under this method, the employee contribution is calculated as 12% of the sum of the basic pay and dearness allowance, and the employer's contribution is calculated as 12% of the basic pay plus dearness allowance minus 8.33% of ₹15,000.

Example 1: -

Employee's Basic Pay + Dearness Allowance = ₹30,000               
Employee's contribution = 12% of ₹30,000 = ₹3,600

Employer's EPF contribution = 12% of ₹30,000 – 8.33% of ₹15,000        
                                                = ₹3,600 - ₹1,250 = ₹2,350
Employer's EPS contribution = 8.33% of ₹15,000
                                                 = ₹1,250 (rounded off)

2. Method #3 - As per this method, the threshold limit of ₹15,000 is considered for calculating the EPF contribution irrespective of the amount of the basic pay. Employee contribution is calculated as 12% of ₹15,000 (instead of the sum of basic pay and DA) and the employer's share is calculated as 3.67% of ₹15,000.

Example 3: -

Employee's Basic Pay + Dearness Allowance = ₹30,000

Employee's contribution = 12% of ₹15,000 = ₹1,800

Employer's EPF contribution = 3.67% of ₹15,000 = ₹551 (rounded off)

Employer's EPS contribution = 12% of ₹15,000 – 3.67% of ₹15,000
                                                 = ₹1,800 – ₹551 = ₹1,249

Universal Account Number

Universal Account Number (UAN) is allotted by EPFO. The UAN number is essential as it links the multiple Member Identification Numbers (Member Id) allotted to employees by different establishments that they served. It is mandatory for all employees to have UAN. It is a one-time permanent number which remains the same throughout a person's career.

UAN helps members in managing multiple member Ids made due to working in multiple establishments. It also makes the PF transfer and withdrawal easy.

Withdrawal and Taxes

Between switching jobs, employees have two options concerning EPF.

1. They can withdraw the PF after waiting for 60 days only if unemployed OR

They can transfer the balance to the new employer using form 13.

For EPF not to be taxable, employees need to have completed at least five years of continuous service. However, it will be considered continuous service if a person has changed employment in less than five years but transferred their EPF to the new employer, therefore, making the transfer of existing PF to the new employer beneficial.

Tax Implications for withdrawing the PF amount before five consecutive years of service - The year of withdrawal will result in taxation on both the total employer contribution and the interest received. Additionally, the amount of the deduction for one's own contributions under Section 80C will be added to one's income in the year of withdrawal. In addition, one will have to pay taxes on the interest they get on their own contributions. TDS (Tax deductible at source) will be applicable at the rate of 10 per cent provided PAN card is submitted. However, no tax is deducted if the employee withdraws PF after five years of continuous service.