Explained: Where Does Your EPF Contribution Go?

The Employees' Provident Fund Organisation (EPFO) administers the EPF (Employees' Provident Fund) retirement benefits scheme. A social security initiative Employees' Provident Fund (EPF) enables both the employer and the employee to make monthly contributions of a fixed amount. On a monthly basis, both the employee and the employer contribute 12% of their basic salary and dearness allowance to the EPF in equal amounts. Each month, the employee makes a contribution to the EPF account equal to 12 percent of his or her basic salary plus the Dearness Allowance. Out of the total of 12 percent, the employer contributes 8.33 percent into the Employee Pension Scheme and 3.67 percent into the EPF. Do you know where those contributions go, though? By talking to experts in the field, we have compiled the response for you.

Swapan Chakraborty, Executive Director, Anand Rathi Wealth Limited

EPFs can be treated as a debt instrument for investing which also provide tax benefit under Section 80C. Employers deduct EPF from salary of employees which is usually 12% of basic + dearness allowance and contribute 3.67% of basic+ dearness allowance to EPF and an equal amount is deducted on behalf of the employee. Government securities and debt instruments forms the major portion of the underlying investment of EPF which account for 80-90% and it has upto 15% exposure in equity . This is one the best debt options in the portfolio of young investors.

Aashika Jain, financial expert and editor at Forbes Advisor

The Employee Provident Fund Organization is the force responsible for investing your EPF contributions.
The EPF contribution is divided such that 3.67% goes to your EPF fund and the remaining 8.33% is moved to the Employees Pension Scheme. The total EPF contribution is parked in a Trust that invests your money in debt-linked government securities and equity-linked market investments (this has begun since the last seven years) to generate returns.

Aniruddha Bose, Chief Business Officer, FinEdge

Your EPF contributions flow into a mix of 85% debt instruments and 15% equities, in accordance with central government norms. Within the debt portion, the lions share flows into state development loans and central government securities, with a very small portion (around 5%) going towards private sector bonds. The private sector debt component used to be higher, but was scaled back after the IL&FS default back in 2018. The EPFO is not permitted to invest funds directly into equities, and is only allowed to invest via the ETF route.

Pamarty Venkataramana ( PVR ) an international corporate lawyer from New Delhi,lndia

The Employees' Provident Fund (EPF) is a social security scheme in many countries, including India and Malaysia, where employees and employers make contributions towards a retirement fund for the employees. The EPF contribution is divided into two parts: the employee's share and the employer's share. A portion of an employee's salary is deducted every month as their EPF contribution. In India, the current employee contribution rate is 12% of the basic wages plus dearness allowance, while in Malaysia, it is 11% of the employee's monthly salary. This amount is deducted from the employee's salary and transferred to their EPF account.

The EPF contributions from both the employee and the employer are deposited into the employee's EPF account. The EPF organization manages these accounts on behalf of the employees. The contributions are invested in various financial instruments, such as government securities, bonds, and equities, to generate returns over time.

These contributions earn a certain rate of interest declared by the EPF organization each year. The interest rate is determined based on the performance of the EPF's investments and is typically higher than regular savings accounts. The interest is credited to the employee's EPF account annually.

The primary purpose of the EPF contribution is to provide employees with a financial cushion for their retirement. When employees reach their retirement age or fulfill specific conditions, they can withdraw their EPF savings, including both the employee and employer contributions, along with the accumulated interest. It provides a financial safety net, ensures long-term savings growth through investments, and offers flexibility for partial withdrawals for various purposes as per the rules and regulations governing the EPF scheme.