Our salary slips always show some Contribution towards a Provident Fund (PF) account. We also see our employer contributing to the same account. However, most often than not, we are not aware how much is contributed by us and by the employer every month towards the Provident Fund Account.
Let us understand in detail about this fabulous long term savings instrument.
Types of PF
Statutory Provident Fund
A statutory provident fund is for the government and semi- government employees (ex: railway officer or any other government body/institution)
Recognized Provident Fund
The recognized provident fund is further classified as 1) Government managed fund and 2) Private trusts managed by the organizations.
There are 3 critical components to Provident Fund
1) Employee Provident Fund (EPF) – In this fund the employee and the employer contribute a defined amount every month with the objective of long term savings/savings for retirement.
2) Employee Pension Scheme (EPS) – In this fund the employer and the central government contribute a defined amount every month with the sole objective of providing regular pension to the employee post retirement.
3) Employee Deposit Linked Insurance (EDLI) – This scheme was introduced in 1976 and it provides life insurance cover to the members of Employee Provident Fund. The insurance amount is linked to the balance in the employee’s PF account with a maximum cover of Rs. 60000/- at any time. Only the employer contributes towards this scheme which is 0.5% of Rs.6500/-
As per the Employee Provident Fund and Miscellaneous Provisions (EPF & MP) Act 1952, an establishment having 20 or more employees need to make contributions towards the Provident Fund.
The contribution needs to be either of the following for both the employer and the employee:
1) 12% of Specified salary ( Basic + DA)
OR
2) 12% of Rs. 6500/-
Contribution Matrix:
Contribution Matrix:
Contribution | EPF | EPS ** | |
Employee | 12% of specified Salary | 12% | NIL |
Employer | 12% of specified Salary | 3.67% | 8.33% |
Central Government | 1.16% of specified salary | NIL | 1.16% |
Total Contribution per month | 15.67% | 9.49% | |
** EPS- Employee Pension Scheme which gives regular annuity after retirement.
Let’s take an example to understand the matrix:
Scenario 1
Mr A, draws basic salary and DA of Rs. 20000/- per month and the employer’s contribution towards PF is similar to Mr. A’s contribution. Their contribution is not on specified salary but on the statutory limit of Rs. 6500/-
Contribution | EPF | EPS | |
Employee | 12% of 6500 | 780 | NIL |
Employer | 12% of 6500 | 239 | 541 |
Central Government | 1.16% of 6500 | NIL | 75.4 |
Total Contribution per month | 1019 | 616.4 | |
Scenario 2
Contribution is not on statutory limit of Rs.6500/- but on the specified salary i.e. Rs.20000/-
Contribution | EPF | EPS | |
Employee | 12% of 20000 | 2400 | NIL |
Employer | 12% of 20000 | 1859 | 541 * |
Central Government | 1.16% of 6500 | NIL | 75.4 * |
Total Contribution per month | 4259 | 616.4 | |
*(Note: Contribution by Employer and Central Government towards EPS (Employee Pension Scheme) is always on Rs. 6500/- (i.e. incase of Employers contribution the balance is contributed towards EPF: 2400-541= 1859)
Hence, as seen in the above two scenario’s you and your employer would be either contributing Rs.780 or Rs.239 respectively towards your PF account or 12% and 3.67% of your specified salary.
Contributing towards Provident Fund always proves to be fruitful because of the following reasons:
1) Employee’s contribution towards PF is exempt from tax u/s 80C of Income Tax Act, 1961, with a maximum limit of Rs.1 Lakh.
2) Interest accumulated is tax free.
3) Safest instrument as return is guaranteed by the government.
4) The entire corpus is tax free during maturity.
(Note: Employer’s contribution is tax free during maturity only if the account is active and maintained for a minimum of 5 years)
Points to be noted:
1) Always make sure you have nominated someone for your PF account. You can nominate one or more nominees for the account. They should be your family members. Only if a person doesn’t have a family, can he nominate any other person.
2) Even if you shift your job, always maintain one PF account. This will be beneficial over the long run due to compounding of interest in the same account and secondly becomes easier to track.
3) Provident Fund account gives 8.5% tax free return (except in 2010-11 where EPFO declared interest at 9.5%) which comes to 12.14% pre tax return. This is much higher than the Bank FD rates and more secured.
So what are you waiting for!!! Contact the concerned department in your organization immediately and increase your contribution towards Provident Fund.
Disclaimer: The data and information provided in this article is only for informational purpose. This being a personal web log, the opinions expressed here represent my own and not those of my employer.
