Understanding PF in Salary: How Provident Fund is Calculated in India?

Provident Fund (PF) is a type of retirement savings scheme, introduced by the Government of India, where both the employer and the employee contribute a fixed amount every month to the employee’s PF account. It is mandatory for employees in establishments having 20 or more employees, regardless of the salary they draw. PF in salary has a major influence on your take-home salary as you contribute 12% of your basic salary towards it.

The meaning of PF in salary and its importance, however, extends beyond the PF percentage in salary. It also offers several tax advantages and helps in better long-term financial planning. In this read, we will explore the in-depth meaning of PF in salary, how it works, and how it is calculated.

What is PF in Salary?

PF full form in salary stands for Provident Fund and it is a retirement savings scheme governed as per the directives laid down by the Employees' Provident Fund and Miscellaneous Provisions Act of 1952. It is mandatory for businesses with 20 or more employees. In rare cases, it may also be applicable to businesses with even fewer employees.

PF Percentage in Salary

Under the EPFO scheme, both the employee and the company (employer) contribute a fixed percentage, usually 12%, of the employee's basic salary each month towards a PF account. The Employees' Provident Fund Organisation (EPFO) manages these contributions and declares the yearly interest rate. The cumulative sum, including interest, gets paid out at retirement or in response to specific circumstances, and is tax-free when withdrawn.

A number of sectors, including jute, coir, and beedi industry, often employ less than 20 employees and are eligible for a reduced contribution of 10%. Irrespective of the percentage in salary, PF is a safe and tax-efficient investment option for employed individuals.

Who Contributes PF in Salary and How Much?

Both the employee and the employer contribute a portion of the salary to the employees’ provident fund. However, their contributions are allocated in different ways. Here is how the PF contribution varies for employee and employers:

1. Employee Contribution

Employees contribute 12% of their basic salary plus Dearness Allowance (DA) to the Employee Provident Fund each month. For example, the employee has a basic salary + dearness allowance of ₹15,000. He/she will contribute 12% of ₹15,000, which is ₹1,800.

2. Employer Contribution

Employers also contribute 12% of the same salary component. However, this is divided into:

• 8.33% to the Employee Pension Scheme (EPS)
• 3.67% directly to the EPF account

The employer additionally pays 0.50% of the Employees Deposit Linked Insurance plan, which is paid out of pocket and not deducted from the employee's salary.

How is PF Calculated in India?

Here is the step-by-step calculation of PF:

• First, the sum of Basic Salary and Dearness Allowance is calculated. (Other special allowances like HRA or conveyance are not added here).
• Then, the employee contributes 12% to the sum of basic salary and dearness allowance.
• Next, the employer’s share is determined. [12% of basic salary + DA, divided into EPS (8.33%) and EPF (3.67%)]
• The total monthly contribution = employee (12%) + employer (12%) = ~24% of basic salary + DA.

For example, for a ₹15,000 amount for basic salary + DA, ₹1,800 is contributed by the employee and ₹1,800 by the employer. This makes ₹3,600 per month. From ₹1,800 by the employer, ₹550 goes to EPF, and ₹1,250 goes to the EPS.

Importance of PF Contributions

Let’s understand why PF contributions are important for any working individual:

1. Retirement Security

PF promotes disciplined saving habits and builds a fund that can be used after retirement or in the event of prolonged incapacity or unemployment. These contributions, along with those from your employer, accumulate over your career to a large lump sum that you get at retirement. It provides you with financial security after you stop working.

2. Tax Benefits

• Employee’s 12% contribution is eligible for deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh per financial year.
• Also, the interest earned and final withdrawal, after 5 years, are both tax-free. If they are withdrawn earlier, that is, before five years, it may attract TDS (Tax Deducted at Source).

If the amount of withdrawal before 5 years is more than ₹50,000 and PAN is submitted, TDS will be deducted at 10%. If PAN is not submitted, a higher rate of TDS is applied.

3. Pension

The EPS portion (8.33%) contributed by the employee is directed into a government-backed pension scheme. For individuals who have not invested in other retirement schemes, the scheme provides the much-needed post-retirement income and supports financial planning.

It is also valuable for employees in the unorganised or lower-income industries, who transition into formal employment or become eligible through certain government or private sector initiatives.

PF Withdrawal Rules

You are allowed to fully withdraw your PF balance under the following conditions:

• You are retired at the age of 58 years.
• You have been unemployed for 2 months or more.
• Or if you have permanently settled abroad.

You can withdraw 75% of your total EPF balance if you are unemployed for 1 month. After 2 months of unemployment, 100% withdrawal of the EPF balance is allowed.

You can also do partial withdrawals or take up PF advances for specific purposes like medical treatment, to buy a new home, for higher education, or marriage. The withdrawal limits depend on the reason and your total years of service. When you take PF advances, you do not need to repay, but your final retirement corpus will be reduced.

Conclusion

PF in salary helps salaried employees build a strong financial future and sufficient retirement savings. With a proper understanding of PF calculation and effective planning, employees can take advantage of both interest earned and tax benefits.

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FAQs about PF in Salary

How can I check my PF balance?

You can check your PF balance with the help of the official PF portal of the government and by logging into your Member PassBook by EPFO. You can also check your PF balance by giving a missed call on 9966044425 or sending SMS EPFOHO UAN to 7738299899 from your registered mobile number.

Is it possible to contribute more than 12% of my basic salary to my PF account?

Yes, you can contribute more than 12% of your basic salary to your PF account based on your willingness and capacity under provisions of Voluntary Provident Fund (VPF). However, it’s not compulsory for the employer to contribute this additional amount.

What to do with my PF account when I switch jobs?

With the help of a UAN (Universal Account Number), you can transfer your PF balance to the new employer. This number remains the same throughout your career.

Can I open a PF account if I am self-employed?

No, you can’t open an account under EPF if you are self-employed, but you can open an account under the Public Provident Fund scheme, which is introduced by the government to help with long-term savings.

What happens if I forget to transfer my PF account when I change jobs?

Your previous PF account will stay active, but it’s advisable to transfer it earlier to avoid multiple PF accounts.