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All You Need To Know About Provident Fund

Last Update Date : April 30, 2019
Estimated Read Time: 9 min

Provident Fund or Pension Fund is the lumpsum amount provided to the salaried employees during their retirement or exit from employment. The pension fund payment can be either on monthly basis or a lumpsum amount paid in one go to the individual supported by the government.

Provident Fund – Introduction

Provident Fund is basically the government managed savings scheme for retirement similar to the Social Security Program in the United States. The employees contribute some portion of their salary to the provident fund along with the contribution made by the Employer. The interest earned also gets credited to the PF account of the employee. For an individual to decide whether he wants to be part of this provident fund scheme is at the beginning of his career. In case he doesn’t want to be part of the Employee Provident Fund scheme, then he can communicate the same to his Employer by filling up Form 11. However, if the person has already contributed to the EPF at least once and there is a valid EPF account on his name, then there is no option to opt out of the scheme.

Employee Provident Fund Act 1952

As the name says, Employee Provident Fund started in 1952 and its named after it as Employees Provident Fund and Miscellaneous Provisions Act, 1952 which is applicable to all states in India excluding Jammu & Kashmir.

Under this Provident Fund scheme, there is a contribution made both by the Employee and Employer, but the amount of contribution is deposited by the Employer. Here the employee share is deducted from the salary by the employer as part of his contribution.

EPF Act – Applicability

As defined u/s 1(3), the act is applicable

  • To all the states excluding Jammu & Kashmir to all the factories, establishments, companies etc that has more than 20 or more employees
  • Those companies or factories as notified by the Central Govt. are also covered under the Act
  • All those establishments in case of the employee strength are less than 20 but notified by the Central Government

Types of Provident Fund

Employee Provident Fund is categorized into 4 different types of provident funds as below:

Statutory Provident Fund

Statutory provident fund is maintained by the Government and Semi-Government organizations, Universities and Educational Institutions, Railways etc as per the provisions of Provident Fund Act 1925.

The Income Tax is deducted on employees’ contribution only and not on the employer’s contribution. Here is the Interest earned on PF along with withdrawal at the time of retirement are tax exempt.

Recognized Provident Fund

Recognized provident fund is where the Commissioner of Income Tax recognizes a certain Organization or an Establishment having 20 or more members who invested in PF as per the guidelines of Provident Fund Act 1952.

Income tax is deducted from employees’ contribution in case it exceeds 12% contribution and 9.5% on the interest credited to the PF account is more than 9.5%.

The lump sum amount at the time of retirement will be tax exempt in case:

  • The service is continuous for 5 or above years by the employee
  • Employee resigns and then later joins a different Organization
  • The balance is transferred to the employee under a Pension Scheme as per Section 80CCD

Unrecognized Provident Fund

Unrecognized Provident Fund is where the Commissioner of Income Tax doesn’t recognize the fund.

Here the contribution made by the Employer is exempted from tax and the payment is made to an employee at the time of retirement is taxable in the following conditions:

  • Interest received on Employers contribution under the head ‘Salary’
  • Interest received on Employee’s contribution under the head ‘Income from Other Sources’
  • Amount received on Employee’s contribution

Public Provident Fund

Public Provident Fund is the Central Government initiative where anyone either salaried or business category can become a member by opening a PF account at State Bank of India or any other nationalised banks.

Break-up of Provident Fund

Provident Fund concept may vary all over the world but the main motive behind it is to provide financial support to the employee at the time of retirement or exit from the employment.

The contribution of PF by employer and employee is 12% and its 10% in case the employee strength is less than 20 individuals. Let’s have a look at the break-up as below:

  1.  12% of employee contribution from his salary goes to his pf account
  2. Employer contribution is as below:
  • 67% towards EPF contribution
  • 33% towards EPS contribution
  • 5% for EDLI contribution
  • 1% for EPF Administration Charges
  • 0.1% for EDLI Administration Charges

The Employer contribution is 13.61% and now let us check under what conditions are the EPF Employer contribution is 10%.

  • In case any Company or Establishment that has less than 20 employees
  • If any Company’s losses are equal to or above its net worth
  • Board for Industrial and Financial Reconstruction
  • All Jute Industries, Coir Industry, Beedi Industry etc

EPF Interest Rates

The interest rates keep changing from year to year as determined by the Central Board of Trustees and Government which gets credited to the employee on 1st April every year.

Here the contributions are made monthly by the employee and employer whereas the interest is calculated on annual basis. The current interest rate is 8.55% for FY 2017-18.

Provident Fund and Income Tax

There are certain benefits associated with Provident Fund like the employer contribution is tax-free u/s 80C of Income Tax Act with a cap of 1.5 lakh per year.

The amount that is withdrawn along with the interest after a specified period of 5 years is also tax exempt.

How is PF account useful and investment in PF useful?

EPF is another name for Pension Fund introduced by the Government to provide financial security to an individual at the time of exit from the employment or during retirement. EPF is a defined benefit plan and investing in PF is always considered as one of the best options by salaried class.

Here are a few reasons to say how the provident fund is beneficial to an individual as listed below:

  • Lumpsum corpus along with Interest at the time of retirement
  • Interest earned on EPF is tax-free
  • An individual can have the tax benefit at the time of Investment u/s 80C for a cap of 1.5 lakhs
  • Helps to meet long-term goals, any unavoidable emergencies etc
  • An individual can create an online account on the EPFO website in order to carry transactions like transfer, online claims, withdrawal etc.
  • All EPFO facilities can be availed online once registration is done on EPFO web site

Rules of PF Withdrawal

As determined by EPFO there are certain situations when PF can be withdrawn by the individual as below

  • When an individual is retiring from employment
  • When an individual is unemployed for a period of 2months or more which has to be certified by a gazetted officer

[ Read: EPF Withdrawal Rule ]

Ways to Check PF Balance

There are various ways to check the balance in the PF account through UAN number, SMS, missed call, mobile app, etc.

How do Provident Funds differ from Social Security?

The United States of America has been operating as per the Social Security Act 1935. In short ‘social security’ means a government system which aims to provide monetary support to those who has inadequate income. All individuals as part of the society have the right to social security where assistance measure are taken providing access as well as using all the resources available to them in the country. Services that are provided are also called ‘social services’.

But in the case of Provident Fund, all the salaried employees are entitled to contribute a certain percentage of their salary to the Provident Fund. Thus, the corpus gets accumulated and can be used in times of need or during retirement as per the requirement.

In some countries, the provident fund accounts are on individual names where they get back the money along with interest. So here the structure of provident fund resembles the concept in U.S. However, the provident fund accounts are managed by the government and not by any private financial institution. Here the Trustee Board or the Employee Provident Fund Organization decides and invests the pf contributions made by employees.

UAN

Universal Account Number is a 12-digit unique number provided to every PF account holder allotted by the Employee Provident Fund Organization. Once the member links Aadhaar Number with UAN he can use all the online EPF services.

[ Read: UAN Activation ]

EPF Registration and Documents Required

A salaried individual is expected to register on EPFO website to carry out any transactions like transfer or withdrawal of PF.

[ Read: EPF Registration Process in Detail ]

EPF Payment, Transfer and Withdrawal

All the salaried individuals who contributed for EPF while working can either transfer or withdraw the amount depending on their need like retirement, illness etc.

[ Read: EPF Transfer Process ]

EPF Benefits

Employee Provident Fund provides a number of benefits to the employees in the form of lump sum amount at the time of retirement, Income Tax benefits while investing into PF up to 1.5 lakhs u/s 80C, tax-free Interest on PF etc.

The contributions made by the employees will be pooled and invested by the Trust and the compound rate of interest will be determined by the Central Board of Trustees which is currently 8.55% for 2017-18.

Interest on Idle Accounts

As per the Government’s decision on November 11, 2016, a decision is made that even inoperable EPF account will earn the benefit of interest against the amount already existing in the PF account. All those employees who are not operating their PF account or the complete amount are not withdrawn will be eligible to earn interest on the amount.

EPF Customer Service

The Employee Provident Fund Organization has their own Customer Service to address the queries regarding PF accounts. All the queries will be addressed with regards to EPF claims, discrepancies in contributions, Withdrawal related issues, claim delays etc.

One can log in to EPFO website (1) to click on “Contact Us” option to get the relevant contact number as per the region.

How can you invest your PF money?

Today’s investors have a wide variety of options available in the market depending on their investment criteria like high/low risk, high returns, tax benefits etc.
Provident Fund is one of the safest and powerful taxes efficient investment instruments where an individual contributes to the fund throughout his carrier. At the time of retirement, the corpus along with Interest is available at his disposal for his personal requirements along with other retirement benefits. They can be Gratuity, Superannuation, Voluntary Retirement Fund etc.

There are also certain individuals who in turn invest this lumpsum PF amount in another investment options to earn higher returns. The life of a person undergoes drastic change post-retirement in terms of his investment behaviour, risk behaviour etc. Here are various risk profiles along with the kind of investment to make with PF amount.

  • In case of Low & Conservative risk profile – In this case, it’s advisable to invest (100% – Your age +15%) of your PF into Equity. For example, in case of age being 60, you can invest 25% in Equity and 75% in Debt. Fixed Income / Debt instruments can be preferred for the balance amount.
  • In case of Medium & Moderate risk profile – Here the investment can be made in Equity (100% – Your age).
    So, it’s 40% in Equity and 60% in Debt instruments.
  • For High & Aggressive risk profile – Here it’s advisable to invest (100% – Your age + 10%) of your PF into Equity. If the age is 60, then you can invest 50% in Equity and 50% in Debt instruments.

On the whole, we can say that EPFO (Employee Provident Fund Organization) formed on 4th March 1952 along with its Board of Trustees caters to the
needs of its members related to Provident Fund (PF), managing PF accounts, Transfer and Withdrawal claims etc. Provident Fund is one of the most effective
savings scheme under the administrative control of the Ministry of Labour and Employment, Government of India.

By now you should be familiar on different aspects like EPF Act, 1952, Types of PF along with its break-up, checking PF Balance, PF and Social Security, Interest on Idle Accounts, EPF Customer Service etc.

In its true sense, the concept of Provident Fund and its main objective is to create long-term savings along with retirement corpus with Interest.

It’s not surprising to say that due to the huge success of this Provident Fund Savings Scheme led to the demand for the expansion of this concept across various industries.

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Niteesh Singh
Niteesh is a Tax Researcher and Content Lead at H&R Block (India). He holds an MBA with a specialisation in BFSI domain. In his career spanning over six years, he has helped thousands of people understand taxes in a simple and effective manner. Outside work, Niteesh is an astronomy geek who is also involved in wildlife conservation activities.

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