The EPF Act Explained: Why Employers must stay compliant
Starting a business nowadays can feel more streamlined than what it used to be 2 decades earlier with endless red tapes and formalities to be followed lot of aspiring would be entrepreneurs trembled more at the possibility of starting a business rather than hoping it succeed. Those days are over as we have stepped into a new system but one thing remains unchanged and it’s the regulations and laws governing new establishments. The impact of these laws has been monumental and it cannot be understated or nor it can be bypassed and one such act which represents employee welfare is the Employee’s Provident Funds and Miscellaneous Provisions Act of 1952 or in short, the EPF Act.
We all know just how importance savings are in our lives and long-term savings have its own advantage as it takes the purpose of savings to one step further and acts as means for security and that is why the EPF act was established, to provide that sense of security through long-term saving to the employee. EPF enables the employee to have a financial grip during employment as it accumulates savings from both the employer and the employee, a double saving if you may like. The Act covers establishments where 20 or more employees are employed and this is not limited private sectors as Central government establishment also come under this act.
The Act provides 3 key provisions to the employees registered under it –
- Provident Fund (EPF): Provident Fund or PF as we may call it is the mandatory savings accumulated from both the Employee’s and Employer’s contribution. Both contributed from a percentage of employee’s salary.
- Pension Fund (EPS): One of two schemes provided by this act which provides a retirement benefit for the employee through pension. This scheme is more focused on the security part using long term savings as a mean.
- Deposit-Linked Insurance Scheme (EDLI): A second type of scheme which provides Insurance coverage to employee in the event of death while in service.
As we dissect the EPF Act we get a clear picture of what it’s all about and what purpose it serves to the employee and for his/her welfare, but what about the employer’s point of view? We will now see what employers gain through this act and why it is imperative to be compliant.
- A Legal Mandate
The EPF Act serves as a statutory requirement and a statutory requirement are sets of rules and laws formally written down to dictate which dictates how things must be done or how they should operate within an organised structure and these requirements are mandated by law and binds individuals and organisations alike, so we can agree that the EPF act is statutory requirements legally mandated binding employers lawfully. The EPF Act is mandatory for establishments employing 20 or more employees but it is not limited to the number of employees employed as certain companies register for the EPF even if the count goes below 20 provided, they notify the governing body. So, if a company does not comply with the act, it not only affects the financial and social security status of the employees that it employs but it also exposes employer’s financial liability makes it prone to legal consequences like lawsuits, prosecutions and even imprisonment in extreme cases.
- Social Security: The Key Term
Gone are the days where an employee can draw pensions only if he is employed in state or central government establishments, the EPF act is a gamechanger as it mandates qualifying companies to adopt a system which ensures a proper social security for its employees and it is not limited to government companies. Having a social security has changed into a status quo in today’s society and as an employer you have a better chance attracting employees if you are registered under the EPF, employees would naturally opt for a company which provides him/her a social security than a company which doesn’t.
- Tax Benefits:
Employees can enjoy tax benefits on their EPF contributions as the interest earned on the EPF balance is tax-exempt (Subject to terms and conditions) and the same applies for the employer, so there’s another reason to be compliant with the EPF Act, a reason which benefits the employer. The employer’s contribution to the EPF is allowed as a business expense and this reduces the employer’s taxable income. This also makes sure that the employers don’t attract fringe benefit taxes (a type of tax owed by employers on certain employee benefits) and this makes it a cost-effective way to provide employee benefits.
- Employee Welfare:
The sole purpose of EPF is to ensure employee welfare and when an employer gets registered under the EPF Act they make sure employee welfare gets a solid foundation. Long-term financial security, partial withdrawals and a fast and transparent process all makes it worthwhile for an employer to provide employee welfare. There are other aspects of employer welfare taken care by companies but an EPF initiative lays a solid foundation of trust and security which is hard to provide through other means.
- Business Transactions:
While EPF compliance is legally mandated it also serves in smooth business transactions for the employer. Specifically for establishments engaging in international transactions, partnerships or expansions. EPF has a considerable impact on business involved in this nature. It can demonstrate Corporate Social Responsibility which is generally viewed favourably by international clients, investors and partners. It can facilitate an encouraging atmosphere among the investors and stakeholders as it reflects the employee welfare and growth through financial stability which in turn correlates with the overall growth of the company itself. What EPF does is that it basically strengthens the company’s profile.
EPFO also facilitates international certifications and audits which are beneficial for the employer as the business prospect can be given a significant boost if they have kept their statutory requirements in check.
EPF Act ensures that the employers’ businesses which apply for foreign direct investment (FDI) have a smooth transition adhering to statutory requirements is essential during investment and due diligence. A compliance track also adds value to the business valuation.
So, we got to know how exactly a business gets benefitted under the EPF Act and how the act changes the whole perspective of running establishments which is sustainable. More and more companies are coming forward with initiating EPF in their organisation and are starting to train their employees as well, making them aware of the benefits of EPF which is still not clearly demonstrated among the workforce in today’s work environment.