- Provident fund is a social security scheme governed under the Employee's Provident fund Act, 1952 ("Act")
- Applies to any organisation with 20 or more employees and the employer has an obligation to maintain a provident fund account for each of its employees
- The employer and the employee are mandated to contribute a portion of the employee's monthly salary towards the employee's provident fund account
- The contributions are accumulated as savings which the employee can enjoy as her retirement benefit. There is a withdrawal provision even before retirement.
- The Employee's Provident Fund Organisation ("EPFO") is the statutory body responsible for monitoring and ensuring compliance under the Act
- An employee is eligible to exit from this scheme upon fulfilling the following criteria:
a. If the basic salary along with the dearness allowance is more than Rs. 15,000/- per month
b. If the employee is a first-time employee and has opted out from the scheme at the time of joining the first employment
c. At the time of joining new employment, if the employee never enrolled under scheme before.
- As a mandate, an employee is required to file a self-declaration under Form 11 at the time of joining any company
- Purpose of filling this form is to:
a. Either transfer Provident Fund from a previous account to a new account (at the time of changing job); or
b. To exit from the Provident Fund scheme at the time of joining first employment if, the basic salary along with dearness allowance is more than Rs. 15,000/- per month (such employees are termed as "Excluded Employees"); or
c. To generate new member ID for new joinees who already have an existing Provident Fund account.
- It is pertinent to understand that the option to opt out under this scheme is available to an employee only at the time of joining the first-employment
- Once an employee enrols under the scheme, he/she cannot opt out of it after making contributions under Form 11.
- Employee is required to inform the employer in writing of his/her intention to exit from the scheme.
- The disadvantages of opting out of the scheme are:
a. The employee will no longer be entitled to employer contribution.
b. The employee will no longer be entitled to the accumulated amount with interest.
c. The employee will no longer be eligible for tax deduction for provident funder under section 80C of the Income Tax Act, 1961.
d. The employee will no longer be eligible to avail benefits under EPS and EDLI.
e. The employee will lose the opportunity of withdrawing the lump sum amount in case of an emergency, loss of employment etc.
- The only advantage of opting out of the scheme is that the employee will be entitled to an increased take home salary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.