EPF &ESI
What is Provident Fund (PF)?
Provident Fund allows employees to contribute a portion of their savings each month to their pension fund. Over time, this amount accumulates and can be accessed as a lump sum, at the end of your employment, or upon retirement. Provident Fund money is a huge amount that helps you grow your retirement corpus.
Under the EPF scheme, an employee has to pay a certain contribution to the scheme and the employer pays an equal contribution. The employee receives a lump sum that includes his own contribution and the employer’s contribution with interest on both, upon retirement.
EPF work?
According to the EPF Act, all organizations with more than 20 employees must register with the EPFO. When a person starts working in an establishment with more than 20 employees, both the person, that is, the employee, and the employer must contribute 12% of the basic salary to the EPF account.
While all 12% of your base salary goes into your EPF account, this is not the case for the employer contribution. Although the employer matches your 12% contribution, only 3.67% of the contribution goes to your EPF account. The remaining 8.33% of the employer’s contribution goes to the employee’s pension plan.
Interest calculation on PF
According to the figures on the official EPF website, the applicable interest rate on the PF is 8.75%, which is paid annually. Compound interest is paid on the beginning balance (the amount accumulated up to the calculation date) each year on April 1.
Employees’ State Insurance (ESI) Scheme
ESI is administered by the State Employees Insurance Corporation, a government entity, which is a self-financed social security and labour welfare organization.
The scheme protects the interest of employees in uncertain events such as temporary or permanent physical disability, illness, maternity, injuries during employment and more. The plan provides both cash benefits and health benefits.
Eligibility for ESI
The ESI scheme applies to all types of establishments, including companies, factories, restaurants, cinemas, offices, medical institutions and others. These units are called Covered Units.
What are the criteria for covered units?
• All units that are covered by the Factories Act and the Stores and Establishments Act are eligible for ESI.
• Where 10 or more people work regardless of their monthly income.
How to identify eligible employees?
All employees of a covered unit, whose monthly income (excluding overtime, bonuses, leave pay) does not exceed rupees. 21,000 per month are eligible to benefits under the scheme.
Employees earning an average daily salary of up to Rs 176 are exempt from ESIC contribution.
However, employers will contribute their share for these employees.
Salary component for ESI Calculation
ESI contributions (employee and employer) are calculated on the employee’s gross monthly salary.
For ESI calculation, the salary comprises of all the monthly payable amounts such as
- –Basic pay,
- –Dearness allowance,
- –City compensatory allowance,
- –House Rent Allowance (HRA),
- –Incentives (including sales commissions),
- –Attendance and overtime payments,
- –Meal allowance,
- –Uniform allowance and
- –Any other special allowances.
The gross monthly salary, however, does not include Annual bonus (such as Diwali bonus), Retrenchment compensation, and Encashment of leave and gratuity.