Ever looked at your salary slip and wondered, what is this PF deduction? If you've been curious about this, you've come to the right place. Today, we'll take you through the meaning of provident fund, the types, and other key details you should know about this category of savings plans.
A provident fund is an investment fund that is set up typically to save for long-term goals such as retirement. In India, we have different types of provident fund plans for individuals from various categories of employment, such as self-employed, private sector employees, and government employees.
Depending on the nature of your employment, you may be eligible for different provident funds. Here is a preview of the common types of provident funds available in India.
Also known as the General Provident Fund (GPF), the Statutory Provident Fund was set up under the Provident Funds Act 1925. It is primarily intended for individuals employed by the government, accredited educational institutions and universities, the railways, and other such specified organisations.
Eligible employees' contributions to the SPF or GPF account earn interest at the rate fixed by the government. This rate may be periodically revised. As of November 2022, the interest rate is set at 7.10% per annum.
This type of provident fund pertains to employees of private organisations with more than 20 employees in their workforce. Here, companies and establishments can either set up their own PF trust, or they can choose to join an existing government-approved scheme.
If an organisation chooses the former course of action, the PF trust they set up should be approved by the Commissioner of Income Tax (CIT).
In the above case, if the Commissioner of Income Tax (CIT) does not approve of the provident fund scheme, it becomes an unrecognised fund.
As the name indicates, this is a type of provident fund available for the general public. You can invest in the PPF scheme irrespective of the nature of your employment. This means you can invest in PPF if you are salaried, self-employed, or even unemployed for a while (as long as you have the funds to invest).
The investment tenure of this option is 15 years, and you can contribute as little as ₹500 or as much as ₹1.5 lakhs each year.
You may have heard of EPF or the Employees' Provident Fund as a part of your salary discussions at work. This is the most common kind of recognised provident fund. In fact, nearly all private sector organisations with 20 or more employees will typically be enrolled in the EPF scheme.
For EPF, the rate of returns on the balance in your EPF account depends on the prevailing interest rate. Currently, as of November 2022, it is 8.10% per annum.
Typically, each month, both the employer and the employee make an equal contribution to the employee's EPF account. The percentage of contributions and the accounts they are directed to are as follows, depending on the employee's salary.
Here, the contribution will be distributed between the Employees' Provident Fund (EPF) and the Employee's Pension Scheme (EPS) as follows:
Employee contribution to EPF: 12% of salary
Employer contribution to EPF: 3.67% of salary
Employer contribution to EPS: 8.33% of salary, up to a ceiling of ₹15,000 on the salary (i.e. ₹1,250)
In this case, the contribution will be distributed between the Employees' Provident Fund (EPF) and the Employee's Pension Scheme (EPS) as follows:
Employee contribution to EPF: 12% of salary
Employer contribution to EPF: 3.67% of salary
Employer contribution to EPS: ₹1,250
Additional employer contribution to EPF: (8.33% of salary) minus ₹1,250
The bottom line is that provident funds of all kinds help employees, self-employed individuals, and people from other walks of life save up for the long term and build a sizable retirement corpus. If your employer also includes EPF as a part of your salary structure, make sure that you keep your EPF funds intact as much as possible and refrain from premature withdrawals unless absolutely necessary. This way, you can retire comfortably.
If you are a private sector employee, the term 'provident fund' in your salary typically means EPF of Employees' Provident Fund. This is a kind of provident fund where the employee and the employer make equal contributions to the account throughout the employee's working years, thus leading to a sizeable corpus at the time of retirement.
In the case of Employees' Provident Fund (EPF), you can make a partial withdrawal or a complete withdrawal, depending on the conditions you fulfill. Whatever the nature of withdrawal, you can proceed with the same by submitting an application online or in person.
A partial withdrawal is permitted for specific purposes such as medical needs, meeting wedding costs or educational expenses, purchase of land, etc. On the other hand, you can effect a complete withdrawal when you retire or if you have been unemployed for more than two months.
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