Employee Provident Fund | EPF - Nepal

The Employee Provident Fund (EPF) is a long-term retirement savings scheme mandated by law for eligible employees in the formal workforce across Nepal.

The EPF operates as a contributory pension scheme that aims to:

  • Provide financial security and adequate income to employees after retirement
  • Enable employees to accumulate tax-free retirement savings throughout their working lives
  • Ensure regular pension payments along with lumpsum benefits upon retiring from service
  • Offer social security blanket and welfare protection to the workforce

Brief History and Evolution

The origins of the formal provident fund in Nepal can be traced back to 1962 when the Employee Provident Fund Act was enacted. This made provident fund enrollment mandatory for employees of factories, mines, plantations, transport agencies, construction firms and other eligible entities.

Initially, both employees and employers contributed 6% and 4% respectively of the employee's monthly basic salary towards EPF. Over the decades, coverage was expanded across industries and services. By 2022, over 1.5 million employees from the country's formal workforce were EPF members.

As of 2022, employees contribute 10% of their basic monthly salary and dearness allowance to the EPF. Employers make a matching contribution of 11% on behalf of each employee. The incremental contributions over the years have resulted in larger retirement corpuses being accumulated by employees.

From providing financial security to select industrial workers in the 1960s to now covering formal sector employees across essential services - the EPF has evolved significantly while staying committed to its objective of funding the retired life of Nepal's workforce.

Eligibility and Enrollment

The Employee Provident Fund (EPF) has set out specific criteria for eligibility to enroll in the scheme:

Criteria for Eligibility

  • Employees working in firms with 10 or more employees are mandatorily required to be part of the EPF scheme.
  • Permanent and contractual employees drawing a monthly salary and meeting the minimum age criteria are eligible.
  • Citizens, foreign nationals as well as expatriate employees can enroll.
  • The minimum age for enrollment is 18 years. There is no maximum age limit for enrollment.

Enrollment Process for Employees

  • Eligible employees are required to fill out a prescribed EPF registration form available with their employer.
  • This form captures details like name, contact information, date of birth, nominee details, previous EPF accounts held if any, etc.
  • Along with the form, copies of documents like citizenship certificate, contract or letter of appointment are submitted to the employer.
  • The employer then submits these documents online to the EPF Organization to activate the EPF account in the employee's name.

Employer's Role and Responsibilities

  • Ensure eligible employees fill out registration forms accurately and assist them in the enrollment process.
  • Verify eligibility documents submitted by employees.
  • Deduct EPF contributions every month from employee's salary.
  • Match the contribution with their own share as the employer.
  • Deposit both contributions in the EPF account before the due dates.
  • Issue annual EPF statements to employees regarding contributions remitted and interest earned.

The enrollment process places responsibilities both on employees to initiate registration and employers to facilitate coverage under the EPF scheme.

Contribution Structure

The EPF scheme is funded through regular contributions from both employees and employers over the course of employment.

Contribution Rates

  • Employees contribute 10% of their basic monthly salary and dearness allowance.
  • Employers have to match this with a 11% monthly contribution of the employee's basic salary plus dearness allowance.
  • The total monthly contribution to an EPF account is therefore 21% of the employee's monthly basic + DA components.

Methods of Contribution

  • EPF contributions are directly deducted by the employer from each employee's monthly salary pay-out.
  • Both the employer and employee share are then deposited into the member's EPF account.
  • Contributions have to be remitted by employers on or before the 15th day of the subsequent month through the approved online portal.

Rules for Voluntary Higher Contributions

  • Members can choose to voluntarily enhance their retirement corpus by opting for additional contributions over the mandatory rate.
  • Members have to submit an application to the EPF Organization along with employer consent to activate additional voluntary contributions.
  • Voluntary employee contributions can be up to 100% of basic pay + DA. No cap is applicable for employer voluntary contributions.
  • The voluntary contributions also qualify for the tax benefit and increment the final corpus alongside the returns for the member.

By following the set contribution structure, employees as well as employers collectively create a retirement fund for each worker under the EPF scheme.

Fund Management

The EPF fund is managed by the Employee Provident Fund Organization (EPFO) which operates the scheme under the Ministry of Labour and Employment.

Governance Structure

  • The EPFO is governed by a central board comprising government representatives, employers, employees and domain experts.
  • The EPFO also has a professional full-time CEO at the helm along with a dedicated management team across areas like Finance, Investments, Compliance etc.
  • Advisory committees and local offices support operations, compliance enforcement and grievance redressal.

Investment Strategies

  • The accumulated EPF corpus is invested by EPFO across fixed income instruments like government securities, fixed deposits etc.
  • Investments focus on balancing three parameters - safety, growth potential and liquidity.
  • Over long-term, investments leverage instruments providing steady, inflation-protected returns to grow member savings.

Regulatory Oversight

  • As a custodian of public retirement funds, EPFO operations are regulated by the Ministry of Labour and Employment.
  • Annual audits, regular reporting mechanisms and transparent disclosures ensure effective compliance and governance.
  • Changes to EPF require approval from the Ministry along with due processes as per applicable laws.

By following a structured governance framework and prudent investment policies, the EPFO strives to effectively administer the EPF corpus entrusted to it by members.

Benefits for Members

The EPF offers much more than just a lump sum at retirement. Members can avail other withdrawals and benefits during their membership.

Types of Withdrawals

  • Retirement - Up to 100% of the accumulated corpus can be withdrawn as pension or lumpsum upon retiring after 58 years of age.
  • Medical Emergency - Members can make pre-retirement withdrawals for expenses related to critical illness, hospitalization, surgery etc.
  • Housing - Up to 50% of the corpus at a time can be withdrawn for buying, constructing or renovating a house.
  • Land Purchase - Funds can be withdrawn for purchasing land as well.

Loan Facilities

Members can avail secured loans against their EPF savings balance at attractively set interest rates starting from 8.5% per annum.

Insurance and Other Financial Benefits

  • The scheme provides a life insurance cover to nominators upon the member's demise.
  • An accidental insurance cover is also available in the event of death or total disability due to an accident.
  • Attractive interest rates which are usually higher than other saving instruments are offered on balances.

By availing such layered benefits tailored specifically for employees, the EPF provides comprehensive financial security for members.

Account Management and Member Services

The EPFO offers members easy access to information along with customer support via the following avenues:

Accessing Account Information

  • Members are issued annual EPF statements showing opening balance, contributions made, interest earned, withdrawals if any and closing balance for the year.
  • Balance statements can also be accessed online by logging into the member portal on the EPFO website using the credentials created during enrollment.
  • Customer care centers and local offices also provide account information on request.

Online Services and Digital Platforms

For ease of self-service, members can utilize the portal, mobile app and UMANG platform to:

  • Check current balance and get mini statements
  • View annual statements
  • Raise grievances and track resolution status
  • Apply online for withdrawals like housing, education or medical needs

Customer Support Services

  • Dedicated call center and mail support available during working hours for queries.
  • For personalized assistance - members can visit the nearest regional EPFO office.
  • Grievance redressal machinery via Sahayata desks at offices.
  • Regular member awareness campaigns.

Multiple access points offered for convenience of members and prompt resolution of their EPF account-related queries.

Tax Implications

The EPF scheme comes with attractive tax benefits for members on both contributions as well withdrawals enhancing the overall corpus accumulation.

Tax Benefits for Contributions

  • The monthly employee share up to 10% of salary as well as the equal employer contribution enjoy exemption under the Income Tax Act.
  • This allows members to save tax on a portion of their salary while also building their retirement funds.

Taxation on Withdrawals

  • Accumulated EPF savings along with interest earnings at retirement after 58 years are fully tax-exempt for the member.
  • Early withdrawals are also tax-free but subject to applicable purpose and monetary limits.
  • This allows more funds in hand for the member when they need it most either at retirement or during contingencies much earlier due to medical, housing, or other admissible needs.

In essence, the unique EPF structure helps save on current income tax via deductions while also enabling future tax-exempt corpus withdrawals. Making it an efficient retirement-savings plus tax-planning tool for employees.

Challenges and Recent Developments

While the EPF serves as an important social security program, it also faces certain challenges in fulfilling its objectives. However, ongoing reforms aim to strengthen the scheme.

Current Challenges

  • Expanding coverage to bring more formal sector employees especially from MSMEs under the ambit of EPF.
  • Enhancing member awareness regarding benefits, online services and planning early for retirement.
  • Inadequate succession planning leading to delays in pension payments for nominees.
  • Manual paperwork slowing down claims processing and updated record keeping.

Recent Reforms and Policy Changes

  • Digital reforms via online portals and mobile apps for ease of access and efficiency enhancement.
  • Reduction of early partial withdrawal conditions from 3 years of contribution to 1 year.
  • Hike of insurance cover for members and lowering eligibility conditions.
  • Exploration of new low-risk investment assets offering stable inflation-adjusted returns.
  • Provisions for self-contribution and coverage of gig economy workers based on income thresholds.

By embracing technology, enhancing awareness, and making processes lean and nimble - the EPFO aims to make the scheme more member-friendly going forward.

Comparative Analysis

The EPF in Nepal has some similar features as well as differences when compared to analogous social security schemes for employees operational across countries.

Comparison with Provident Funds in Other Countries

  • Contribution rates in Nepal currently stand at 10% employee and 11% employer share of salary. This is broadly in line with rates in India but lower than contribution rates of up to 20% in countries like Singapore and Malaysia.
  • In terms of returns, Nepal's EPF offers ~10% per annum over long term similar to funds in other Asian countries. However, returns are lower than 12-15% earned by the Singapore and Malaysia provident funds.
  • EPF Nepal offers interest rates of 8.5% on advances providing loan facilities. Provident funds in countries like India and UAE have concessional loan rates as well in the 4-9% range.
  • While coverage spans over 1.5 million members in Nepal, other provident funds especially in Malaysia and Singapore cater to significantly higher share - up to 80% of the countries' workforce indicating wider participation.

Best Practices

Adopting best practices from global pension systems could enhance Nepal's EPF value proposition:

  • Asset diversification with higher equity investments to augment returns like Canadian pension funds.
  • Composite ICT infrastructure and national identifier system powering Singapore's CPF for seamless services and analysis.
  • Well invested communication campaigns as done by Employees Provident Fund Malaysia to drive voluntary coverage not mandated by law.

By emulating some of these best practices while retaining local adaptations, Nepal's EPF can evolve further in line with member needs and global standards.

Future Outlook

With evolving macroeconomic conditions and workforce trends, Nepal’s EPF structure is also expected to undergo changes in the coming decade.

Anticipated Changes and Trends

  • Gradual expansion of EPF coverage to the large unorganized services sector and gig economy workers. This could enhance the share of workforce covered from the current sub-20% levels.
  • Introduction of a centralized corporate-grade ICT infrastructure for seamless nationwide service delivery and efficiency enhancement.
  • Changes in asset allocation and investment avenues aligned to global best practices to augment returns while balancing risks.
  • Increase in the statutory contribution rates from current 21% levels as well as voluntary coverage promoted by tax benefits.

Potential Impact on Employees and the Economy

Broadly, a revamped EPF ecosystem in Nepal could:

  • Provide adequate post-retirement income to larger share of the elderly population enhancing their financial independence.
  • Boost domestic savings and capital formation feeding into economic growth.
  • Offer supplementary benefits like life and health insurance improving workforce productivity.
  • Incentivize formalization of employment gradually.

The strengthening of retirement and social security systems hence remains vital for Nepal’s socio-economic progress as well as its agenda for inclusive and sustainable growth in the coming decade.

Conclusion

The Employee Provident Fund enables employees in Nepal to systematically build savings for life after retirement. By mandating joint contributions from employers and employees over the working lifespan, it ensures financial preparedness for the post-employment years.

Summary of Key Points

  • Introduced in 1962, the EPF is a forced retirement savings scheme for the formal workforce in Nepal
  • Managed by the EPFO, it has over 1.5 million members with 21% of monthly salary contributed
  • Corpus is invested safely to deliver inflation-protected returns for enhancing accumulation
  • It provides pension, insurance and loans offering comprehensive benefits besides retirement lumpsum
  • Recent digital push has enhanced services but more awareness and coverage expansion is vital

Final Thoughts and Recommendations

The EPF's future relevance would depend on aligning itself to the needs of a predominantly young, tech-savvy workforce while also adapting to Nepal’s macroeconomic changes. Some recommendations in this direction would be to:

  • Expand coverage through flexible options customized for self-employed persons and MSME employees
  • Develop integrated digital systems enabling anywhere anytime access via mobile devices
  • Diversify fund investments for higher returns while balancing associated risks
  • Introduce low-cost access to supplemental health and life insurance plans

By embracing positive changes, the EPF can lead the movement towards income security after retirement for a larger share of Nepal’s workforce in the coming decade.