Payout from EPFO insurance scheme is tax free: Check details here

In a bid to support employees affected by the coronavirus pandemic, the Employees' Provident Fund Organisation (EPFO) raised the maximum benefit available under the Employees' Deposit Linked Insurance (EDLI) scheme from Rs 6 lakh to Rs 7 lakh (35 times the basic salary), according to a gazette notification dated April 29, 2021.

The minimum death benefit under the scheme has been fixed at Rs 2.5 lakh, with effect from February 15, 2020. A bonus is also available under the scheme. The maximum is Rs 1.75 lakh.

Prashant Singh, business head, compliance and payroll outsourcing, TeamLease Services, said, “The insurance amount is paid to the family of the EDLI scheme subscriber if the latter dies while in employment.”

Key features

All organisations covered under the EPF scheme automatically get enrolled in the EDLI scheme. The subscriber should have been employed continuously during the 12 months prior to the month in which he died.

The benefit of this insurance cover will go to an employee even if he changed his employment during those 12 months.

Archit Gupta, chief executive officer (CEO), ClearTax says, “The nominee receives a one-time lump sum payout of up to Rs 7 lakh upon death of the EPF subscriber due to a natural cause, illness or accident.”

Employees don't have to pay anything to avail of this scheme. Singh says, “Employers are required to contribute 0.5 per cent of the wage of the employee, subject to a wage ceiling of Rs 15,000.”

How claim amount is calculated

The insurance cover is determined on the basis of the basic salary drawn by the employee in the past 12 months. 

EDLI scheme claim amount = 35 x average basic salary + bonus equal to 50 per cent of average EPF balance in the deceased’s account, or maximum of Rs 1.75 lakh.

Here, salary refers to basic pay plus dearness allowance (DA). Suppose, an employee’s average basic salary + DA was Rs 15,000 in the last 12 months before his death. His insurance claim will be: (35 x 15,000) + 1,75,000 = Rs 7 lakh. This is the maximum amount that can be claimed.

Claiming the benefit

With the introduction of e-nomination last year, the onus for updating the nominee details lies with the employee. Nonetheless, if the nominee's name is not available in the provident fund account, the deceased employee’s legal heir can claim the insurance amount.

The nominee or the legal heir needs to fill EPF Form 5 IF to claim the insurance benefit. Rishad Manekia, founder and managing director (MD), Kairos Capital, a financial planning firm, says, “Before submitting the claim form at the EPFO office, the nominee or the legal heir should get the EDLI form and the required documents attested by the employer." 

If the claimant is unable to receive the employer's signature, the form should be attested by a gazetted officer; a magistrate; a member, chairman, or secretary of the local municipal board. Or, a postmaster or sub-postmaster; or a member of the regional committee of EPF. 

Gupta says, "Once the required documents are submitted to the regional EPF commissioner's office, the claim is processed within 30 days. If not, the claimant will receive interest at 12 per cent per annum until the benefit is disbursed.” 

Finally, don't forget to submit Form 20 (for EPF withdrawal claim) as well as Form 10C/D (for Employee Pension Scheme or EPS) to claim all the benefits under the three schemes—EPF, EPS, and EDLI — together, as this will make the process easier.

Taxation

The amount contributed by the employer is allowed as business expenditure. Gopal Bohra, partner, NA Shah Associates, says, "Death benefit received by the employee’s legal heir or nominee is tax free."