Employee Provident Fund
Also written EPF · Employees Provident Fund · EPF Scheme
A mandatory retirement savings scheme where employer and employee each contribute 12% of basic pay, credited to the employee's own account and paid out as a lump sum at retirement.
In plain language
For most salaried Indians, retirement saving does not start with a personal decision to invest. It starts automatically, deducted from the payslip every month, matched rupee for rupee by the employer.
That automatic scheme is the Employee Provident Fund, required under law for employers covered by the EPF & MP Act.
How it works
Under the Employees' Provident Fund and Miscellaneous Provisions (EPF & MP) Act, 1952, the employee and the employer each contribute 12% (10% in some special cases) of basic emoluments and allowances to the employee's EPF account. Employees may voluntarily contribute more than the statutory rate; the employer's contribution stays fixed at 12%/10%.
The government declares an interest rate on the scheme each year, credited to individual accounts. Annual statements show the opening balance, contributions, interest credited and closing balance.
Partial withdrawals are allowed for specified purposes — housing, education, health, marriage. The full balance is paid as a lump sum on retirement, total and permanent disablement, death in service, or early retirement.
Tax treatment: contributions by both employer and employee qualify for deduction under section 123/Schedule XV (old section 80C), subject to the prescribed limit. Interest credited on the employee's own contribution above Rs 2,50,000 a year (Rs 5,00,000 if there is no employer contribution) is taxable, effective 1 April 2021. Employer contributions to a recognised PF, NPS and an approved superannuation fund, combined, above Rs 7,50,000 a year, are taxed as a perquisite. The accumulated maturity balance is exempt from tax, but withdrawal before completing 5 years of continuous service attracts TDS at 10%.
A worked example
Ms Pillai earns a basic salary of Rs 40,000 a month. Her employer deducts 12% (Rs 4,800) from her pay each month and matches it with another Rs 4,800, so Rs 9,600 goes into her EPF account every month, before any interest.
Over a year, her own contribution totals Rs 57,600, comfortably under the Rs 2,50,000 threshold above which interest on her own contribution would become taxable. At retirement after 30 years of continuous service, her full accumulated balance — contributions plus compounded interest — is paid to her as a tax-free lump sum.
Had she instead left her job and withdrawn her EPF balance after only 3 years of continuous service, the withdrawal would have attracted TDS at 10%, since it falls short of the 5-year continuous-service requirement for tax-free withdrawal.
Why NISM asks about it
Chapter 6, section 6.1 (Mandatory Retirement Benefit Schemes), opens with the EPF Scheme as the base scheme before covering EPS and EDLI, both of which are funded by diverting a slice of the same employer contribution. Expect the 12%/10% contribution rate, the Rs 2.5 lakh / Rs 5 lakh interest-taxability threshold, and the 5-year continuous service / 10% TDS rule as direct recall points.
Common exam traps
- The employer's contribution is fixed at 12%/10%; only the employee can voluntarily contribute more. A question describing a higher employer contribution than the statutory rate is describing something other than standard EPF.
- Rs 2,50,000 is the interest-taxability threshold on the employee's own contribution generally; Rs 5,00,000 applies specifically where there is no employer contribution — two different thresholds for two different situations.
- Withdrawal before 5 years of continuous service attracts 10% TDS — this is separate from, and does not override, the section 123/80C contribution deduction already claimed in earlier years.
- EPS and EDLI are carved out of, or added on top of, the same employer contribution stream — do not treat EPF, EPS and EDLI as three unrelated pools of money.
Check yourself
1.Where does the money for the Employee Pension Scheme come from?
- a)A fresh contribution of 8.33 percent by the employee
- b)8.33 percent DIVERTED from the employer's contribution to the EPF, plus 1.16 percent of wages from the Central Government
- c)A matching contribution of 12 percent by both employer and employee
- d)Entirely from the Central Government at 8.33 percent of wages
Show the answer
Answer: (b) 8.33 percent DIVERTED from the employer's contribution to the EPF, plus 1.16 percent of wages from the Central Government
"8.33 PERCENT (SUBJECT TO LIMITS) FROM THE EMPLOYER'S CONTRIBUTION TO THE EMPLOYEE PROVIDENT FUND (EPF) IS DIVERTED TO THE EPS. THE CENTRAL GOVERNMENT ALSO CONTRIBUTES 1.16 PERCENT OF THE WAGES."
⚠️ The word DIVERTED carries the whole answer. Nothing extra is contributed by the employer — of its existing 12 percent, a slice funds a lifetime pension and the remainder builds the provident fund lump sum. The only genuinely new money is the government's 1.16 percent.
The scheme is run by the EPFO and IS GUARANTEED BY THE GOVERNMENT, providing pensions for life to members or their family upon retirement AT THE AGE OF 58 — an age worth noting, since it differs from the 60 that governs almost everything else in this workbook.
On higher pension claims, the workbook is deliberately open-ended: eligible members may be subject to additional options under EPS-95 based on EPFO circulars and judicial directions, and ADVISERS SHOULD REFER TO THE LATEST EPFO GUIDANCE.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- GratuityA lump sum an employer must pay under the Payment of Gratuity Act, 1972 on termination after at least five years of continuous service, a condition waived on death or disablement.
- Defined Contribution (DC) schemeA retirement scheme where the contribution amount is fixed but the eventual pension is not — it depends entirely on the returns earned on the invested corpus.
- Employee Deposit-Linked Insurance SchemeA mandatory, employer-funded life insurance benefit for EPF members, paying an assurance benefit to the nominee on top of the provident fund balance if the member dies while in service.
- Employee Pension SchemeA government-guaranteed pension scheme funded by diverting 8.33% of the employer's EPF contribution, plus a 1.16% central government top-up, paying members a lifelong pension from age 58.
- Section 80CThe income-tax deduction for money put into life insurance, provident fund, ELSS, five-year bank deposits, NPS Tier 1, NSC and home-loan principal, capped in aggregate at Rs 1,50,000 a year.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- Permanent Retirement Account NumberThe unique account number issued when an NPS account is opened; it stays with the subscriber for life and across employers, which is what makes NPS portable in a way EPF historically was not.
- Voluntary Provident FundAn EPF member's option to contribute more than the mandatory 12% of basic and dearness allowance into the same EPF account, up to 100% of it, with no matching contribution from the employer.
- Five-year service testThe rule that makes an EPF withdrawal tax-free: complete five consecutive years of service and the balance is exempt; withdraw before that and it is taxable, with two exceptions.
- Universal Account NumberA 12-digit number allotted to every employee contributing to the EPF, unchanged for life across every employer — the key that makes an online PF transfer possible instead of a taxable withdrawal.
- SuperannuationAn organisational pension programme set up by an employer for its employees, funded through an irrevocable trust or a life insurer, typically paying annuities on retirement.
- Accumulation stageThe working years, in which saving and investment build the retirement corpus — the stage where the ability to take risk is highest and where time, not contribution size, does most of the work.
- Dormant EPF accountAn EPF account with no contribution for 3 straight years — it still earns taxable interest until retirement, unlike an inoperative account, where interest stops altogether.
- Double add-backWhen an employer's NPS contribution above Rs 7.5 lakh is added to salary twice over — once as ordinary salary income, once as a perquisite — while only one deduction is ever allowed against it.
- Employees Pension Scheme shareThe 8.33% slice of the employer's 12% EPF contribution that is diverted into EPS instead of the employee's own provident fund balance — capped by a Rs 15,000 monthly wage ceiling, and earns no interest.
- Superannuation benefitAn employer-funded retirement scheme, on top of the mandatory PF, that pays one-third of the accumulated corpus as a lump sum and converts the rest into an annuity.
- Life-stage evaluationJudging a retirement benefit product against the objectives of the stage the investor is in — pre-retirement, retirement or post-retirement — because each stage needs a different thing from the product.
- Market linked retirement productsRetirement accumulation products whose return depends on markets — NPS, ELSS and other mutual fund schemes — set against non-market-linked products such as PPF, where the principal is not at risk.