Provident Fund (PF) is a crucial savings plan for employees, offering long-term financial security. As per the Employees' Provident Fund Act, both employees and employers contribute 12% of the salary plus dearness allowance, with a portion allocated to the Employee Pension Scheme. The remaining amount accumulates in the PF account, earning an interest rate of 8.10% for 2022-2023. 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.

Here in this blog, we cover an overview of the PF.

Provident Fund: A Savings Plan for the Salaried 

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. 

Benefits of the Provident Fund Scheme

• 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. 

Gateway to a Happy Retirement

Here's a list of the top highlights of the Provident Fund scheme: 

• 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.

Conclusion

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.

Frequently Asked Questions

1. What is the PF contribution percentage?

Regarding PF in salary, you and your employer must contribute 12% of your basic salary and dearness allowance. 8.33% of the employer's contribution goes to EPS, while 3.67% goes to your PF account.  

2. Can I withdraw the entire PF amount?

Yes. You can only withdraw the entire PF corpus on retiring or when you're unemployed for over two months. The current age for the same is capped at 58 years. Read more in this blog about withdrawing your EPF contribution.

3. How is PF calculated?

PF is calculated on your basic salary and dearness allowance. Since private employees don't get D.A., it's based on the base pay amount. The interest on the same is calculated every month but credited to the account at the end of the fiscal year.