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Employees’ Provident Fund

A statutory, hybrid, interest guarantee retirement plan administered and supervised by a government entity called the Employees’ Provident Fund Organization (EPFO).

The defined contribution portion of the plan allows for an employee and an employer contribution.

The employees contribute up to 12% of their basic salary with the option of paying an additional 12% contribution.

The employers also pay 12% of basic salary, out of which 8.33% is used to fund the pension portion of the provident fund, called the Employee Pension Scheme. The remaining 3.67% is deposited into the employee’s Provident Fund account.

Interest is credited at a rate that is announced by EPFO each year in consultation with the government.

Employers pay an additional 1.61% to EPFO partly as an administration charge and partly to buy life insurance for the employees.

The general view of the market is that EPFO has not provided a satisfactory service to its members.

Consequently, companies, certain classes of employees and even specific employees are trying to take advantage of a clause in the governing legislation to opt out of the plan.

However, such applications must be approved by EPFO, and this is a very cumbersome process.

If a company does overcome the administrative obstacles and opts out through a private retirement trust, the trust must match the annual interest provided by EPFO.

It must be noted that the interest credited by the EPFO is gross of charges and the employer pays 80D 21 those charges through an additional 1.61% levy.

In a trust fund, the investment management fees will reduce the interest that can be credited to employee balances.

This makes the interest credited by the private trust very difficult to achieve without taking an investment risk that the employer will have to underwrite.

These conspire as the major deterrents for employers setting up private provident fund trusts.