What Is PF in Salary and How Is It Calculated?
Demystify Provident Fund (PF) in your salary. Grasp its definition, calculation, management, and tax treatment for informed financial decisions.
A Provident Fund (PF) is a mandatory savings scheme providing financial security to employees upon retirement or unforeseen circumstances. It is a significant component of an employee’s compensation, with contributions typically deducted directly from salary. While retirement savings funds exist globally, the Provident Fund, particularly the Employees’ Provident Fund (EPF), is a social security program primarily relevant in India, serving as a long-term savings vehicle for salaried individuals.
Understanding Provident Fund Basics
The term “PF” most commonly refers to the Employees’ Provident Fund (EPF) in India, a government-backed retirement savings scheme. Its primary objective is to help salaried individuals accumulate a substantial financial corpus for their post-retirement life. This scheme also offers financial assistance during certain contingencies.
The Employees’ Provident Fund Organisation (EPFO) is the governmental body responsible for administering and regulating the EPF scheme. EPFO oversees the collection of contributions, management of funds, and settlement of claims. The EPFO ensures the scheme provides social security benefits, including a lump sum payment at retirement, resignation, or in case of death, and also manages an associated pension scheme.
How Provident Fund Contributions Work
Contributions to the Provident Fund are a dual responsibility, with both the employee and the employer contributing a portion of the employee’s salary. Typically, both parties contribute 12% of the employee’s basic salary and dearness allowance (DA) each month. The employee’s share is deducted directly from their monthly pay.
The employer’s 12% contribution is allocated differently: 8.33% is directed towards the Employee Pension Scheme (EPS), while the remaining 3.67% is deposited into the employee’s EPF account. For employees earning a basic salary and DA up to ₹15,000 per month, EPF contribution is mandatory. If an employee’s basic salary and DA exceed this threshold, the contribution is still calculated based on the ₹15,000 limit for the mandatory portion. There are ongoing discussions regarding potentially raising this wage ceiling to ₹21,000 or even ₹30,000, which would expand coverage and alter contribution calculations for higher earners.
Managing Your Provident Fund Account
Each employee participating in the Provident Fund scheme is assigned a Universal Account Number (UAN), a unique 12-digit identifier. This UAN serves as a permanent identifier for the PF account, remaining constant throughout an employee’s career regardless of job changes. The UAN links all previous and current Provident Fund accounts, simplifying the process of tracking contributions and transfers.
Employees can monitor their Provident Fund balance and other account details through various channels provided by the EPFO. These include online portals, SMS services, and dedicated mobile applications. To access these services, the UAN must be activated and linked with necessary details such as Aadhaar and PAN. While the fund is primarily for retirement, partial withdrawals are permissible under specific conditions, such as for medical emergencies, house purchases, or unemployment.
Taxation of Provident Fund
Employee contributions to the EPF are eligible for tax deductions under relevant income tax laws, up to a certain limit. The interest earned on the accumulated Provident Fund balance is tax-exempt. For the financial year 2024-2025, the interest rate for EPF deposits is set at 8.25% per annum.
Withdrawals from the Provident Fund are tax-free if the employee has completed five or more years of continuous service. If a withdrawal occurs before completing five years of continuous service, the amount may become taxable. In such premature withdrawals, the employee’s contribution is taxed according to their income slab, while the employer’s contribution and the interest earned on both contributions are fully taxable. Tax Deducted at Source (TDS) may be applicable on withdrawals exceeding typically ₹50,000, if made before the five-year service period, with rates varying based on the submission of a Permanent Account Number (PAN).