As per the rules, in EPF, employee whose ‘pay’ is more than Rs. 15,000 per month at the time of joining, is not eligible and is called non-eligible employee. Employees drawing less than Rs 15000 per month have to mandatorily become members of the EPF. However, an employee who is drawing ‘pay’ above prescribed limit (at present Rs 15,000) can become a member with permission of Assistant PF Commissioner, if he and his employer agree.
Contribution by employer and employee
The contribution paid by the employer is 12% of basic wages plus dearness allowance plus retaining allowance. An equal contribution is payable by the employee also. In the case of establishments which employ less than 20 employees or meet certain other conditions, as per the EPFO rules, the contribution rate for both employee and the employer is limited to 10 percent.
For most employees of the private sector, it’s the basic salary on which the contribution is calculated. For example, if the monthly basic salary is Rs 30,000, the employee contribution towards his or her EPF would be Rs 3,600 a month ( 12 percent of basic pay) while the equal amount is contributed by the employer each month.
It should, however, be noted that not all of the employer’s share moves into the EPF kitty. Out of employer’s contribution, 8.33% will be diverted to Employees’ Pension Scheme, but it is calculated on Rs 15,000. So, for every employee with basic pay equal to Rs 15,000 or more, the diversion is Rs 1,250 each month into EPS. If the basic pay is less than Rs 15000 then 8.33% of that full amount will go into EPS. The balance will be retained in the EPF scheme. On retirement, the employee will get his full share plus the balance of Employer’s share retained to his credit in EPF account.
Higher voluntary contribution by employee or Voluntary Provident Fund
The employee can voluntarily pay higher contribution above the statutory rate of 12 percent of basic pay. This is called contribution towards Voluntary Provident Fund (VPF) which is accounted for separately. This VPF also earns tax-free interest. However, the employer does not have to match such voluntary contribution.
Calculation of EPF
Employee Provident fund interest is calculated on the Contributions made by the employee as well as the employer. Contribution made by the employee equals 12% of his/her Basic Pay plus Dearness Allowance (DA). When the Basic Pay + DA is less than or equal to Rs 15000, the employee contribution is 12% of Basic Pay + DA, whereas the employer contribution is 3.67% of the Basic Pay + DA.
Note:(12% Employer contribution will be divided into 2 parts i.e. 8.33% towards Employees pension scheme and rest 3.67% towards Provident fund)
Typically, Employer 12% Contribution is divided as follows:
- 3.67% into Employee Provident fund
- 8.33% into Employees pension scheme
- 0.5% into Employees’ Deposit Linked Insurance Scheme (EDLIS)
- 0.01% towards EDLIS Administrative Charges
If the employee income is below or equal to 15,000/- (Compulsory)
- Employees’ Basic Pay + DA: Rs 15000.
- Employee contribution towards EPF: 12% x 15000 = Rs.1,800/-
12% Employer contribution will be divided into 2 parts i.e. 8.33% towards Employees pension scheme and rest 3.67% towards Employee Provident fund.
- But employer contribution towards provident fund is Rs.15,000 x 3.67% = Rs.550.5/-
- Remaining 8.33% towards Employee pension scheme (EPS) that is 15,000/-x 8.33% = Rs.1249.5/-.
If the employee income is above 15,000/- (Exempted but Voluntary)
There are 3 methods of computing the contributions if the income is above the threshold of Rs 15000. Any one of these methods can be adopted by an employer. The most commonly used is the first method.
Methods
In the EPF calculator, we have used the 1st method for computing the employee and the employer contribution. Just to understand our methodology, let us take the following case:
- Employees’ Basic Pay + DA: Rs 25000.
- Employee contribution towards EPF: 12% x 25000 = Rs 3000
12% Employer contribution will be divided into 2 parts i.e. 8.33% towards Employees pension scheme and rest 3.67% towards Employee Provident fund.
- Employer contribution towards provident fund @12% on Rs.25,000/- = Rs. 3000/-
- But employer contribution towards Employee pension scheme (EPS) is calculated on Rs. 15,000/- only i.e. @ 8.33% = 1250/- (rounding off).
- Rest of the provident fund amount Rs.3000 – 1250 = 1750 is paid towards employees provident fund.
Hence the final employer contribution towards Employee Provident fund will be Rs 1750
Illustration: (Assuming 9% rate of interest on EPF)
Total EPF balance at the end of the year = Balance at the end of 12 month (Employee plus the Employer contribution) + Sum of the interest earned in each month in the year = 57000 + 2351 = Rs 59351
As regards the withdrawal, one can withdraw the full EPF balance on attaining the age of 58 years. However, he can withdraw 90% of the EPF corpus on attaining the age of 57 years.
What is the liability of an employer if an employee salary is above the upper limit of PF contribution? – Supposed an employee salary is Rs 200000/- and BASIC +Dearness is 120000/-, what would be the minimum contribution that an employer has to make? can it still be 12% of 15000? if so under what circumstances .
If a fresher directly employed for a salary and his Basic pay +DA is above the upper limit for PF contribution, then his employer is not liable to contribute 12% of Basic +DA towards PF.
If an employee employed for a salary and has Basic pay +DA below the limit of PF contribution then his employer as his part part of PF contribution, has to pay 12% of Basic +DA towards PF contribution and should subscribed for PF account with UID (unique identification code) and employer should also deduct 12% of Basic +DA from that employee salary to contribute the same towards PF . But over a period of time the same employee by his seniority or else employed in other organization draws the salary with Basic pay +DA above the upper limit for PF contribution then his employer has to pay 12% of Basic +DA as PF contribution and also. Which means if an employee is already subscriber of PF account from the beginning then his employer has to pay PF contribution as 12% of Basic pay +DA .