Advantages and Disadvantages of Employee Provident Fund (EPF)

Narendra Kumar

30 Aug, 2023

Introduction 

EPF is an employee benefit program implemented to guarantee employees a future with better benefits. Employee Provident Funds are a legal benefit that the employees can use as an advantage after leaving employment or in retirement time. Employees who pass away on behalf of their dependents will be able to collect the benefits. Employers and workers are both required to contribute to the Fund under the Workers’ Provident Fund Scheme. The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (“Act”) is applicable across all the states in India established the Employees’ Provident Fund. All the industries and factories mentioned in Schedule 1 of the Act that employ twenty people or more are subject to the Act. EPF registration is required for a specific kind of business. Salaried workers build up an employee provident fund for retirement benefits. It is, in a nutshell, a retirement plan for all paid workers. The salaried worker’s ultimate financial objective is to save for their retirement. Employee Provident Fund enters the scene in this situation. 

Advantages of Employee Provident Fund 

The employees have many advantages after they register under the Employee Provident Fund Act¹; some of the merits are mentioned below:

• Employee provident funds give guaranteed returns to the employees. 
• There are many tax benefits given to the employee provident funds.
• One of the main benefits of employee provident funds is that they are long-term savings. 
• In the event of an emergency, such as a medical emergency, purchasing or building of a house, or further Education, a partial withdrawal from EPF accounts is allowed.
• A retired individual receives EPS money in a lump amount combined with PF.
• Members who reach the age of 58 and have logged 10 years of service without making any withdrawals are eligible for a pension. The Provident Fund receives the member’s contribution, which is 12% of the basic plus daily allowance.
• Partial withdrawals are subject to restrictions. A partial withdrawal request is to be made by electronic means by the account holder.
• When an employer contributes, 8.33% of the 12% goes to the employee pension plan, and the remaining 12% goes to the provident fund account.
• According to the person’s average income and the number of years of work, a pension is awarded.
• Individuals can withdraw from these accumulations to meet life’s financial needs; no reimbursement is required unless it was utilized improperly. 
• The member may pay the account upon resignation. The subscriber receives his interest as well as his PF and Employer contributions. 

Benefits in Case of Death

• Form 2 consists of all the information about the nominee.
• When a member dies, the family of that member or the nominee will be eligible for the benefits of EPF.
• The pension can be received by the family, parents or a nominee of the member.
• The insurance amount will be given to the family.
• Capital return on pension will be given.

Benefits in case of Insurance

According to the Employee Deposit Linked Insurance Scheme, if a corporation does not have a group insurance plan, the organization must pay a monthly payment. For many individuals, this may seem like a pittance, but for family members who work in tiny businesses, this sum is sufficient to ensure their livelihood.

Benefits in Case of Pension

Pension is only given directly to the members themselves. But when the death takes place at that time, the pension is given to the member’s family. A certificate called a scheme certificate is there, which consists of information about the list of members’ services and their families. This certificate can be given when they apply for it and before they turn 58. When a member dies, the family member who has a valid certificate will receive the pension. This is a better option as compared to the withdrawal of the pension.

Benefits in case of Withdrawal

• This sum is calculated solely on the basis of
• The last Average Salary and
• (Service and not on the actual amount of funds in the Pension Fund Account).
• Even if the Employer has not made contributions to the Pension Fund, EPFO guarantees pensions to members.
• A member may withdraw funds from their pension account even if they are not pension eligible.

Employee Provident is a case of Special Occasions.

In marriage, Education is needed for the self, child or any sibling

Up to fifty percent of the contribution can be withdrawn for marriage, education purposes, a child or any siblings. Members are eligible for these perks three times. The member eligible for the aforementioned rewards must have served for at least seven years and possess all legally admissible proof of the circumstances in question.

On purchase of your Dream House

• If you have completed a decade of service and have a house loan that has to be repaid, you may use up to 36 months of salary from your EPF balance.
• A member may take money out of their EPF account for home upkeep, home repairs, or loan repayment. Members must meet the conditions mentioned.
• Any renovations or repairs to your current home are permitted. A member may withdraw up to one year’s worth of salary. The member must complete five years of service for the aforementioned bonus or ten years for repairs.

On Medical Emergency

Members are eligible for benefits in cases of serious hospital surgery or illnesses, including Tuberculosis,

• Leprosy,
• Paralysis,
• Cancer,
• Mental illness, or
• Heart disease.

A member may withdraw no more than six times their annual pay or their whole accumulated contribution, whichever is smaller. The money can be used for oneself or any family member.

Disadvantages of Employee Provident Fund 

1. One of the main disadvantages of employee provident funds is its inaccessibility. The employee provident funds are kept in a locked period. The employee provident fund cannot be used anytime you want. They have a specific time period which cannot be violated. The liquidity cannot be seen in the case of employee provident funds.
2. If you change jobs very frequently, then the concept of employee provident funds is not a merit for you. When the employee provident funds are withdrawn before five years, it changes into taxable income.
3. If the lock-in period for the employee provident funds is not completed, then there can be penalties for the same. There are very strict rules for withdrawals of funds.
4. There are only limited returns in employee provident funds, which act as a major disadvantage.

EPF registration through the online process

• You can apply for employee provident funds through an online process. To apply, you can visit the official website of EPFO: https://www.epfindia.gov.in/.
• Then you can complete all the necessary details.
• The next step will be the verification step through OTP.
• After the completion and verification of the application, the DSC will be needed to register online.
• After completing all the steps, the EPE certificate will be granted.
• You can now update all the information of the employees.

Conclusion 

Employee provident funds are an essential tool for future planning as well as retirement plans. EPF encourages savings, results in tax benefits, and ensures a plan for retirement. EPF acts as a long-term savings that will act as a bonus at the time of retirement or when leaving the job. The Employee Provident Fund schemes give social security to the employees. As it is a compulsory contribution, there is transparency and accuracy.

1. https://www.epfindia.gov.in/site_docs/PDFs/Downloads_PDFs/EPFAct1952.pdf