What is PF in Salary – Meaning, Full Form & Calculations in Employee Provident Fund

In the realm of employment and remuneration, it is essential to understand the various components that make up an employee’s salary. One such component that often raises questions is PF (Full form of PF in salary is Provident Fund).

This article aims to delve into the concept of PF in salary, explaining its types and PF eligibility. By gaining clarity on this topic, individuals can better comprehend their financial entitlements and plan for a secure future.

What is PF in Salary?

The Provident Fund (PF) is an important savings scheme for employees, aimed at providing financial security in the long run. By contributing to the PF, employees can build a retirement fund that helps cover living expenses after they stop working. This can include costs for healthcare or even leisure activities during retirement.

Besides being a retirement fund, the PF can act as an emergency reserve. Under certain conditions, you can withdraw some or all of the money if you need it. Additionally, the money you put into the PF is tax-free up to ₹1.5 Lakhs under Section 80(C) of the Indian Income Tax Act, but this applies only if you choose the Old Tax Regime.

As per the Employees’ Provident Fund Act, your contribution is limited to 12% of your salary and dearness allowance. Your employer matches this amount, but it’s worth noting that 8.33% of their contribution goes into the Employee Pension Scheme, while the remaining 3.67% is directed to your PF account. The PF is included in your Cost to Company (CTC), which is the total amount your employer spends on you, ensuring you have benefits for retirement.

What are the Types of Provident Funds?

Depending on your employment, different types of provident funds are available in India. They include:

1. Statutory Provident Fund
   

   This provident fund type is primarily established for employees working for the government, railways, universities and educational institutions, and other specified entities. The eligible employees for this type of provident fund account earn interest rates, decided as per the government, on their savings.

2. Recognised Provident Fund
   

   This provident fund type is for private sector employees from organisations with more than 20 employees. Such companies can either have their own PF account or join a government PF scheme. If the company chooses to have its own PF trust, they need approval from the CIT (Commissioner of Income Tax.)

3. Unrecognised Provident Fund
   

   This type of PF is when the CIT does not approve the above case of recognised provident fund.

4. Public Provident Fund PPF

   Public Provident Fund, is a type of PF open to the public. Anyone can invest in it. It doesn’t matter what the nature of your employment is. So, whether you are self-employed or salaried, you can invest in this PF scheme as long as you have the funds to invest. The tenure for PPF is about 15 years, and you can invest ₹500 to ₹1.5 Lakh yearly.

How Does PF (Provident Fund) Work?

Provident Fund (PF) is a retirement fund that helps salaried employees save money. Here’s how it works: Companies with more than 20 employees are required to provide Provident Fund (PF) benefits to their staff.

• Mandatory Contribution: If you earn less than ₹15,000 per month, it’s mandatory to be part of the EPF (Employees’ Provident Fund) scheme.
• Voluntary Contribution: Those earning over ₹15,000 per month can still choose to participate in the PF scheme voluntarily.
• Contribution Rate: The minimum contribution rate is set at 12%, though you can contribute more voluntarily. However, your employer is not obligated to match any additional contributions beyond 12%.
• Benefits: Being a part of the EPF scheme gives you access to pension and insurance benefits under the Employees’ Pension Scheme (EPS) and the Employees’ Deposit Linked Insurance Scheme (EDLI).
• Tax Benefits: Since EPF is categorised under the EEE (Exempt-Exempt-Exempt) tax system, the maturity amount will be tax-free as long as you’ve served for at least five continuous years.
• Withdrawal: You can withdraw your PF balance after retirement or under certain conditions, such as buying a house or medical emergencies.
• Transfer: In the unfortunate event of your death, your nominee has the right to withdraw your PF balance.
• Disadvantages: There are some disadvantages to be aware of. For example, if you withdraw more than ₹50,000 before completing five years, a 10% TDS will apply, and if you leave the scheme before the five-year mark, you’ll face a tax penalty.

How Does PF in Salary Work?

Every employee’s EPF account is funded by two sources: the employee’s contribution and the employer’s contribution.

• The Employee’s EPF Contribution: (Your Part): As an employee, you’re required to contribute 12% of your basic salary and Dearness Allowance (DA) to your EPF account each month. For example, if your monthly basic salary is ₹15,000, you’d contribute ₹1,800.
• The Employer’s EPF Contribution: (Your Employer’s Part):Your employer also contributes to your EPF. They contribute 8.33% of your basic salary and DA to the Employees’ Pension Scheme (EPS) and the remaining 3.67% to your EPF account. So, for a ₹15,000 basic salary, your employer would contribute ₹550 to your EPF.

The total monthly EPF contribution will be Combining both contributions, your total monthly EPF contribution for a ₹15,000 salary would be ₹2,350.

Eligibility Criteria for Employee’s Provident Fund

To qualify for the Employee’s Provident Fund (EPF), certain conditions need to be met. Here’s a breakdown of the eligibility criteria:

• Employee Status: The individual must be an employee of an establishment that is covered under the Employees’ Provident Funds and Miscellaneous Provisions Act. This typically includes those working in companies with a specified number of employees.
• Age Limit: There isn’t a strict age limit for EPF eligibility. However, it typically applies to employees who are between the ages of 18 and 58. Employees can contribute until retirement, but some rules may vary depending on the organisation’s policies.
• Basic Salary: The employee’s basic salary plays a role in determining eligibility. Those earning above a certain threshold (currently set at ₹15,000 per month) are required to contribute to the EPF, while employees with lower salaries may also opt in.
• Nature of Employment: The type of employment matters as well. Regular employees working in the organised sector are eligible, while those in unorganised or informal sectors may not qualify unless their employer voluntarily opts to contribute.
• Continuous Service: To be eligible for benefits under the EPF scheme, employees must have a continuous service record. This means they should not have any significant breaks in their employment history with the same organisation.

Difference between EPF and PPF

Let’s understand the nuances of EPF and PPF side-by-side.

How Interest is Calculated in EPF

Interest on your Employee Provident Fund (EPF) contributions is figured out every month using a straightforward formula:

Interest = (Opening balance at the start of the year + Contributions made during the year) × Interest rate / 12

Here’s what each term means:

• Opening balance: This is the amount in your EPF account at the beginning of the financial year, which starts on April 1.
• Contributions: This includes all the money added to your EPF account from April 1 to March 31 of the financial year.
• Interest rate: This is the rate set by the government for that particular financial year.

For the financial year 2023-24, the government has set the interest rate at 8.25%. At the end of the year, any interest earned is added to your EPF balance.

It’s important to remember that interest is calculated on the balance in your EPF account each month, not just on the total contributions made by you and your employer throughout the year. This means that the longer your money stays in the EPF, the more interest you can earn.

Tax Advantages for Payment to EPF

When it comes to contributing to the Employee Provident Fund (EPF) in India, there are some tax perks for both employees and employers that are worth noting:

For Employees:

• Tax Deductions: If you contribute to your EPF, you can claim a tax deduction under Section 80C of the Income Tax Act. This deduction can go up to Rs. 1.5 lakh in a financial year, which helps reduce your taxable income.
• Tax-Free Interest: Any interest you earn on your EPF contributions is tax-free. This means you don’t have to pay taxes on the money your savings earn over time.
• Tax-Free Withdrawals: If you’ve been working for at least five continuous years and decide to withdraw from your EPF, you won’t be taxed on that amount. This is a great incentive to save for the long term.

For Employers:

• Business Expense Deductions: Employers can deduct their contributions to the EPF from their taxable income as a business expense. This is outlined in Section 36(1)(iv) of the Income Tax Act, making it beneficial for companies as well.
• Pension Scheme Contributions: If an employer contributes to the pension scheme under the EPF, these contributions are also tax-deductible under the same section.

Benefits of Investing in the Employee Provident Fund

1. Retirement Savings

   The Employees’ Provident Fund (EPF) is a savings plan designed to help employees set aside a part of their salary each month for retirement. This fund grows over time and can provide a steady income when they retire, offering financial peace of mind.

2. Tax Benefits

   When employees contribute to the EPF, they can deduct these contributions from their taxable income under Section 80C of the Income Tax Act, 1961. The interest earned on these savings is also tax-free, meaning it doesn’t count toward the employee’s taxable income. Plus, if they withdraw their funds after five years of continuous service, there are no taxes on that amount either.

3. Low Risk

   EPF is considered a low-risk option for saving. The Government of India backs the interest on EPF contributions, which means it’s a dependable way to grow savings without worrying about losing money. This makes it a safer choice compared to other investments, similar to fixed deposits that guarantee returns.

4. Compound Interest

   One of the great features of the EPF is that it offers compound interest, which means employees earn interest not just on their original savings but also on the interest that has been added over the years. This compounding effect helps grow the retirement fund more significantly.

5. Flexibility

   EPF also provides some flexibility. Employees can withdraw money from their EPF account for certain needs, like marriage, education, or medical emergencies. After completing five years of service, they can also make partial withdrawals when necessary.

6. Nomination

   Employees can name a beneficiary for their EPF account, ensuring that their savings go to a loved one if something happens to them unexpectedly. This adds an extra layer of security for their family.

7. Partial Withdrawal for Financial Emergencies

   If you face a medical emergency or other urgent situations, you can partially withdraw money from your Provident Fund (PF) account to help cover costs. This option allows you to access some of your savings when you really need it.

8. Loan Against Your PF

   In case of emergencies, you can take out a loan against your PF balance. However, it’s important to remember that you need to repay this loan within 36 months from when you receive the funds. This can be a useful option if you find yourself in a tight spot.

9. Free Insurance Coverage

   If an employee passes away while still working, their family is eligible for free insurance coverage of up to ₹ 7 lakh under the Employees Deposit Linked Insurance (EDLI) scheme. To qualify for this death benefit, the employee must be contributing to the insurance premium.

10. Pension Provision

    Once you reach the age of 58, you can start receiving a pension from your PF account. To be eligible for this pension, you need to have made regular contributions to your PF for at least 15 years. One key advantage of this pension comes from your employer, who contributes 8.33% of the total PF amount into your EPF account, helping you build a more secure financial future.

How to Calculate PF Amount at Retirement?

If you’re looking to figure out how much money you’ll have in your Provident Fund (PF) when you retire, here’s a simple way to do it:

1. Enter Your Birth Date: Start by entering your date of birth and note that the maximum retirement age is 58 years.
2. Add Your Monthly Salary: Next, input your basic monthly salary along with any expected annual salary increases.
3. Include Contributions: Provide the contribution amounts made by both you (the employee) and your employer.
4. Check Interest Rates: Make sure to include the interest rates set by the federal government for the EPF balance.
5. Use the EPF Formula: Finally, use the EPF calculation formula to work out the total amount you’ll have based on the details you’ve entered.

Mathematical Formula to Calculate the Provident Fund

To find out the Provident Fund (PF) balance for a month, the organisation first determines the interest rate for the financial year. You can calculate the annual interest by taking the monthly balance, multiplying it by the interest rate, and then dividing by 1200.

For instance, if an employee has a basic salary of ₹15,000 each month and the EPF contribution rate is 12%, the employee would contribute ₹15,000 x 12% = ₹1,800 to the EPF every month. This process helps ensure that employees save effectively for their future.

Conditions to Withdraw Employee Provident Funds

Here are the situations when employees can withdraw their Employee Provident Fund (EPF), giving them options to handle their financial needs:

1. Retirement: When employees reach retirement age, usually between 58 and 60 years, they can access their EPF savings as allowed by the government.
2. Unemployment: If someone is unemployed for more than two months, they can withdraw a part of their EPF funds.
3. Medical Expenses: Employees can use their EPF for medical treatments for themselves, their spouse, children, or dependent parents.
4. Home Loan Repayment: Employees can make partial withdrawals from their EPF to help pay off home loans, though there are certain rules and limits.
5. Education: EPF funds can also be used for higher education costs for themselves, their spouse, or children.
6. Marriage: Employees are allowed to withdraw money for marriage expenses after completing a specific period of service.
7. Renovation or Construction: Funds can be accessed for renovating or building a house.
8. Emergency: In cases of financial emergencies, such as natural disasters or serious health issues, employees can use their EPF savings.
9. Disability: If someone faces permanent disability, they can withdraw some or all of their EPF balance.
10. Migration: Those who are moving abroad permanently can withdraw their EPF, but there are some conditions to meet.

Bottom Line

PF in salary refers to the contribution made by an employee and employer towards their retirement fund. It is a mandatory deduction as per the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, in India.

Understanding PF is crucial for employees as it secures their future and provides tax benefits and financial stability during retirement. By actively participating in the PF scheme, individuals can ensure a comfortable post-retirement life. Therefore, both employees and employers need to be well-informed about PF in salary and its implications.

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Written and Reviewed by:

Priyanka Rao

Author

Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.

Colin D'Souza

Financial Content Reviewer

Colin D'Souza is currently the Vice President of Banking Programs and Strategy at Jupiter Money, where he oversees the development and execution of key banking initiatives. With a strong background in retail banking, sales, and strategy, Colin brings extensive experience in driving business growth and enhancing customer engagement across various financial products and services.

Before joining Jupiter, Colin was the Head of Corporate Salary Business at IDFC First Bank, having previously served as the Zonal Business Head for Retail Liabilities & Branch Banking. His leadership at IDFC First Bank focused on expanding the bank’s retail banking footprint and optimizing branch operations. Prior to that, he held senior roles at Citibank India, where he was Vice President and Regional Sales Head, responsible for the sales and distribution of consumer assets and liabilities, including services for high-net-worth individuals (HNI) and ultra-high-net-worth individuals (UHNI), as well as current accounts.

Colin also served as Vice President and Regional Sales Manager at HSBC, leading retail liability acquisitions and driving business development for investment and insurance products. Earlier in his career, he managed a cluster of branches at CitiFinancial, where he was responsible for credit, risk, and P&L management.

He holds a Post Graduate Diploma in Management from the Institute of Management Education and Research (IMER), adding a solid academic foundation to his professional expertise in banking and strategy.