PF and ESI are the two most common terms when it comes to labour laws that affect employees. These are the statutory programs created to give an assured future to employees so that the security and welfare of employees are protected. This blog discusses their applicability and determination in details covering both employers, as well as employees.
Employee Provident Fund (EPF) in a Nutshell
An Employee Provident Fund (EPF) is a retirement benefit scheme under the Employees Provident Fund and Miscellaneous Act of 1952. The provident fund is a mixed contribution from you and your employer that is subtracted from your salary each month and kept in a PF account to accumulate into a sizeable sum for you to use after retirement. The Employee Provident Fund Organization (EPFO) oversees the program.
The employee gets a lump sum payment at retirement and during the service period, comprising their and the employer’s grants and interest. The initial amount and accrued interest are not taxable when withdrawn, rendering this a suitable retirement option for salaried workers.
The scheme applies to all entities having 20 or more employees, and some entities are included with some limitations and exemptions even if the requirement of 20-plus employees is lacking. The interest rate for EPF is revised each year. The interest rate is computed for the month-by-month culminating balance initially and subsequently for the whole fiscal year following the EPFO’s announcement of its interest rate.
Calculation of EPF
The government has initiated some rules to assess how much money is to be assigned to the EPF account for every employee. Primarily, the provident fund of every employee in a firm includes the employee’s personal contribution along with the employer’s contribution.
Here is a stepwise breakdown of how PF is calculated on salary utilizing the specified information:
- Basic salary
- Duration of your employment
- Dearness Allowance (DA)
- Your recent EPF balance (if any)
- EPF interest rate
1. Figuring out the Employee’s Contribution
Your contribution will comprise 12 per cent of the salary (basic plus dearness allowance). If the basic salary is Rs 20,000 per month, the employee contribution will be 12% of 20000, which amounts to Rs 2400. This amount is termed the employee contribution.
2. Figuring out the Employer’s Contribution
Your employer’s contribution consists of two parts. Out of 12%, the employer commits 8.33% to the Employee Pension Scheme, while the remaining 3.67% is committed to the EPF. So, 3.67% of Rs 20000 is Rs 734.
Thus, each month, the total grant to the EPF account, for a salary of Rs 20,000 with employee contribution added to the employer contribution, is Rs 3134 in this case.
If you’re seeking an easier way to compute provident funds, you can also utilize an online provident fund calculator. Simply input details such as your present age, current salary, retirement age, and projected growth in income, and let the calculator do the rest. It’s a simple and convenient way to manage your PF and ESI calculations.
3. Computing Interest
The interest rate for the EPF for the year 2025-26 is 8.25%. Nonetheless, this interest is not assessed at the end of the year. It is assessed at the end of each month and stored in the EPF account following the completion of the financial year.
For instance, if the EPF gathered in the first month is Rs 3134, the second month will see another contribution of the identical amount. Therefore, the total amount in the account will add up to Rs 6268. Now, monthly interest applies to it. Thus, if the yearly interest is 8.25%, the monthly rate would be 8.25/12, which is 0.6785%.
So, 0.6785% of Rs 6268 will be Rs 42.52838, the monthly interest figured out on your EPF for the second month. It will keep rising as the monthly contributions add up over the financial year. At the culmination of the year, the interest gathered will be added and stored in the EPF account.
If there is any available balance in your EPF account, it will also be used to calculate interest. The calculation is performed for all the ensuing months likewise.
This is the manual calculation of PF and the interest rate, but you can also calculate online utilizing any PF calculator on different websites.
Establishments with PF registration are required to file PF returns.
Overview of Employee State Insurance Scheme (ESI)
The Employees State Insurance Scheme, or ESI, is insurance coverage offered to workers to assist them in uncertain and difficult times. It is a self-financed fund administered by the Employee State Insurance Corporation and falls under the ESI Act, 1948. Such aid arises when employees are unfit to work due to pregnancy, illness, or workplace mishaps.
This sum is self-financed by employees from their gross salary, with extra contributions from the employer.
According to the ESI Act, all establishments with over 10 employees are covered and need to maintain an ESI fund. All shops, factories and establishments are incorporated under the ESI Act except otherwise stated by the Act. Further, employees are insured if their salary is under Rs 21,000 each month, and the organization comes under ESI.
Contribution for ESI
According to the recent budget 2023-34, ESIC contribution stays the same.
Under the rules framed by ESIC, employees receive a 0.75% reduction from their respective gross salaries, while employers contribute 3.25% of the employee’s gross pay as ESI. Thus, a total of 4% (employer plus employee) accumulates as the ESI grant in the employee’s account for withdrawal in the event of any medical emergency like maternity, disability, or unemployment.
Calculation of ESI
When computing ESI, the categories that constitute an employee’s gross salary include Dearness Allowance, Basic Pay, House Rent Allowance, Meal Allowance, City Compensatory Allowance, Uniform Allowance, Attendance and Overtime Pay, Incentives and other Specific Allowances.
If your gross Salary is Rs 20,000
Your contribution: Rs 20,000 * 0.75% = Rs 150
Employer contribution: Rs 20,000 * 3.25% = Rs 650
Total ESI contribution: Rs 150 + Rs 650 = Rs 800
Employees getting a daily average wage of Rs 176 are exempt from sharing, though their employees still make their contribution.
ESI return filing is compulsory for employer compliance, contributions, detailing wages, and crucial information for the ESI system’s efficiency.
Wrapping Up
Fulfilling ESI and PF needs is not just a legal requirement but a key step for businesses to safeguard the wellness and financial stability of their employees. Changing rules and paperwork can make it hard to stay compliant, apart from contribution handling. But it is important to protect companies from fees and fulfilling their business ethics.
For all your PF and ESI-related needs, you can reach out to our team at kanakkupillai.
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