The Employees Provident Fund (EPF) is a government-backed retirement savings plan designed to ensure financial stability for employees once they retire. The management of this fund falls under the Employees Provident Fund Organization (EPFO), which operates under the Ministry of Labor and Employment. Both the employer and the employee contribute equally to the EPF, helping to build up savings over time.
As the employee continues to work, the money in the EPF grows until retirement. Any salaried worker earning up to Rs 15,000 a month is required to contribute, with both the employer and employee matching the contributions.
Each year, the government sets the interest rate for the EPF, typically after discussions with the Finance Ministry. For the financial year 2024-25, the interest rate has been set at 8.33 percent. Employees can only withdraw their EPF balance upon retirement, when changing jobs, or in certain emergency situations. However, if someone withdraws their EPF balance before completing five years of service, that amount will be subject to taxes. Contributions to the EPF are eligible for tax deductions under Section 80C of the Income Tax Act, and the interest earned on these contributions is tax-exempt.
So, how does EPF function?
Employees contribute a portion of their salary to the EPF scheme, and their employers match that amount. This combined contribution is sent to the EPFO. The funds in the EPF account earn interest at a fixed rate, which is credited annually by the EPFO.
If you put in Rs 7,000 from your salary into the EPF each month, your employer will match that with another Rs 7,000. So, you’ll have a total of Rs 14,000 going into your EPF account.
You’ll earn interest on that amount, which is currently at 8.33% per year, and it’s credited annually. Keep in mind that this interest rate can change since the EPFO reviews it at the start of each business year. By law, the EPF contribution is set at 12% of the employee’s basic salary plus any dearness allowance (DA).