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What is PF in Salary: Everything You Need to Know

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February 17, 2023


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Provident Fund (PF) is a crucial savings plan for employees, offering long-term financial security. PF contributions help build a retirement corpus, providing stability for post-service years and covering expenses like medical bills or leisure activities. 

It also serves as an emergency fund, allowing partial or full withdrawals under specific circumstances. Additionally, contributions made to the PF account are tax-exempt under Section 80 (C) of the Indian Income Tax Act, up to ₹1.5 Lakhs (if you’ve opted for the Old Tax Regime). Read this blog to compare the old and new tax regimes.

In this blog, we will explore what is PF and its benefits along with tax treatments. Let’s dive in! 

What is PF (Provident Fund)?

According to the Employees' Provident Fund Act, your contribution is capped at 12% of your salary plus the dearness allowance. While your employer has to match this 12% contribution, 8.33% of this amount goes to the Employee Pension Scheme, and the remaining 3.67% goes to your PF account. PF is a part of your CTC (cost to company) and goes towards ensuring retirement benefits. 

How Does PF (Provident Fund) Work?

  • All companies with more than 20 employees must extend PF benefits to employees.
  • If you're a salaried individual earning less than ₹15,000 per month, you must join the EPF scheme. 
  • If you earn more than ₹15,000, you can still voluntarily join the PF scheme. 
  • While the basic contribution is capped at 12%, you can increase your voluntary contributions. However, this increased amount will not be matched by the employer. 
  • As a member of the EPF scheme, you can avail several pension and insurance benefits under the Employees' Pension Scheme, and Employees' Deposit Linked Insurance Scheme.
  • Since EPF is an exempt-exempt-exempt scheme (EEE tax category), the maturity amount you'll receive will be tax-free if you're in service for five consecutive years. 
  • Your listed nominee can withdraw your PF amount in the case of your untimely demise. 

However, there are some disadvantages of PF in salary. For instance, premature withdrawals of more than ₹50,000 will attract a TDS of 10%. Similarly, exiting before the 5-year service term is completed, will also attract a tax penalty.

Learn more about EPF interest and how to calculate it here.

PF (Provident Fund) Contribution Components

1. Employee's Contribution:

  • This is the portion of the PF contribution that the employee contributes from their salary.
  • The standard contribution rate is usually a percentage of the employee's basic salary and dearness allowance. In many countries, including India, the common rate is 12% of the basic salary.
  • This amount is deducted from the employee's salary before tax calculations.

2. Employer's Contribution:

  • The employer also makes a contribution to the employee's PF account. The employer's contribution is in addition to the employee's contribution.
  • The employer's contribution is divided into two parts:
  1. Employee Provident Fund (EPF): This is the portion that goes into the employee's PF account and is meant for the employee's retirement savings.
  2. Employee Pension Scheme (EPS): In addition to the EPF, there is a contribution towards the Employee Pension Scheme, which provides a pension to the employee after retirement.
  • The employer's contribution is also typically a percentage of the employee's basic salary and dearness allowance.

These contributions collectively form the total Provident Fund amount, which grows over time with accrued interest. The PF scheme aims to provide financial security to employees during their retirement by building a substantial savings corpus. The specific rates and rules may vary by country, and it's essential to be aware of the regulations governing PF contributions in the relevant jurisdiction. 

Benefits of PF (Provident Fund)

  • The funds deposited into your PF account don't lie idle. Rather, they earn interest per the rate issued by the EPFO. The PF interest rate for the 2022-2023 bracket currently stands at 8.10%. 
  • PF contributions help build a retirement corpus giving you financial stability in your after-service years. You can fall back on this corpus to meet medical expenses and living costs or take a holiday. 
  • You can use your PF account as an emergency funds reserve. The EPFO allows for partial and full withdrawals under specific conditions (marriage, home renovation, home loan payments, death, etc.) where you can get immediate financial assistance. 
  • Contributions you make to the PF account fall under Section 80 (C) of the Indian Income Tax Act and are tax-exempt up to ₹1.5 Lakhs. 

PF (Provident Fund) and Taxation

Employee's Contribution (EPF):

  • The employee contributes a certain percentage of their salary (12% in most cases) towards the Employees' Provident Fund (EPF).
  • This contribution is eligible for tax deductions under Section 80C of the Income Tax Act, up to a specified limit.
  • Example:
  • Let's say an employee's annual salary is Rs. 5,00,000, and they contribute Rs. 60,000 (12% of the salary) to their EPF account. This Rs. 60,000 can be claimed as a deduction from their total income under Section 80C.

Employer's Contribution (EPF and EPS):

  • The employer also contributes to the EPF on behalf of the employee. The contribution is divided into two parts: EPF (Employee Provident Fund) and EPS (Employee Pension Scheme).
  • The employer's contribution to EPF is not directly taxable in the hands of the employee.
  • The employer's contribution to EPS is also not taxable for the employee.
  • Example:
  • If the employer contributes Rs. 5,000 to EPF and Rs. 1,000 to EPS on behalf of the employee, the entire Rs. 6,000 is not added to the taxable income of the employee.

Interest on EPF:

  • The EPF contributions accumulate interest over time. The interest earned on the EPF balance is tax-free.
  • Example:
  • If the EPF balance grows by Rs. 10,000 due to interest in a financial year, this Rs. 10,000 is not considered as taxable income for the employee.

Withdrawal and Taxation:

  • EPF withdrawals are tax-free if the employee has completed five years of continuous service. If the withdrawal is made before completing five years, the amount becomes taxable.
  • Example:
  • If an employee withdraws their EPF balance after seven years of service, the entire amount is tax-free. However, if they withdraw it after three years, the amount becomes taxable.

It's essential to keep in mind that tax laws may change, so it's advisable to consult with a tax professional or check for the latest updates from the tax authorities.


The Provident Fund (PF) is a powerful savings plan that offers long-term financial security for employees. With contributions from both employees and employers, the PF account accumulates funds that earn an interest rate of 8.10%. This helps build a retirement corpus, providing stability and covering expenses in post-service years. The PF account also serves as an emergency fund, allowing withdrawals under specific circumstances. Additionally, contributions to the PF account are tax-exempt up to ₹1.5 Lakhs under Section 80 (C) of the Indian Income Tax Act. While PF offers numerous benefits, it's important to be aware of certain considerations, such as tax implications for premature withdrawals. Overall, the Provident Fund scheme serves as a gateway to a happy retirement, ensuring financial well-being for employees in the long run. 

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Frequently Asked Qusestions 

1. How can understanding PF in salary benefit employees in the long term?

Understanding PF in salary benefits employees in the long term by facilitating informed financial planning, ensuring retirement savings, and potentially offering tax advantages. It provides a structured approach to wealth accumulation, contributing to financial security and stability in the later stages of one's career and beyond.

2. What are the components of PF contributions, and how are they calculated?

PF contributions consist of the employee's and employer's components. Employees usually contribute a percentage of their basic salary, and employers contribute both to the Employee Provident Fund (EPF) and the Employee Pension Scheme (EPS). The typical contribution rate is 12% of the basic salary for both employees and employers.

3. What are the key advantages of having a PF account for retirement savings?

Key advantages of a PF account for retirement savings include tax benefits, a disciplined savings approach, employer contributions, and the potential for long-term wealth accumulation with compounded interest.

4. What's the difference between an employee's contribution and an employer's contribution to PF?

An employee contributes a percentage of their salary to PF, typically 12%, while the employer also contributes, divided into Employee Provident Fund (EPF) and Employee Pension Scheme (EPS) contributions. The employer's contribution is in addition to the employee's and includes both EPF and EPS components.

5. Are there limits on the amount an individual can contribute to their PF account?

Yes, there are limits on individual PF contributions. The employee's contribution is typically capped at a percentage of their salary, commonly 12%. However, there isn't a specific upper limit for employer contributions.

6. What is the process for withdrawing funds from a PF account, and when is it allowed?

Withdrawal from a PF account is allowed for purposes like retirement, unemployment, or medical emergencies. The process involves submitting a withdrawal application to the Employee Provident Fund Organization (EPFO) through the employer.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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