How to Calculate PF on Salary: A Step-by-Step Guide (with Formula & Meaning)

Social security is a cornerstone of modern society, providing protection and support to the people. In India, the legacy of social security protection dates back to 1925, with the passing of the first Provident Fund Act. This act paved the way for a reliable retirement scheme for countless Indians.

If you are an employee in India, a portion of your salary is likely contributed towards the Employees Provident Fund (EPF). As a result, EPF calculation on salary becomes an integral part of payroll management and annual accounting processes. Although it may seem complex at first, the calculation is quite simple.

What are PF (Provident Fund) and EPF?  

The Provident Fund (PF) is a government-managed retirement savings scheme designed to provide financial security to employees after retirement. Think of it as a forced savings plan where you and your Employer contribute equal monthly amounts toward your future. 

The Employees’ Provident Fund (EPF) is a retirement-focused scheme where both the employer and employee contribute a specific PF percentage in salary every month. This mandatory savings fund is overseen by the Employees’ Provident Fund Organisation (EPFO), and it plays a vital role in securing your financial future.

While people use PF and EPF interchangeably in everyday conversation, EPF is technically the official name of the scheme. 

PF Full Form: PF stands for Provident Fund. EPF stands for Employees' Provident Fund. 

This retirement benefits scheme is mandatory for salaried employees in organisations with 20 or more workers, subject to certain salary thresholds. Employees get a unique UAN (Universal Account Number) that remains constant throughout their career, even when changing jobs. 

PF Meaning in Your Salary Slip Explained 

When you look at your salary slip, you'll notice a deduction line item labelled "PF" or "EPF Contribution." This represents your contribution (typically 12% of your basic Salary plus dearness allowance) that goes into your EPF account. 

Many don't realise that your Employer also matches this contribution, effectively doubling the amount going into your retirement fund. While this deduction does reduce your take-home pay today, it's building significant wealth for your future - with the added benefit of compound interest over decades. 

The PF deduction in your salary slip represents one of the most essential forced savings mechanisms most Indians can access.

How to calculate EPF using formula?

To understand PF calculation on salary, let’s list down it’s 3 main components:

• Employee’s Contribution: 12% of Basic Salary, including Dearness Allowance.
• Employer’s Contribution: 8.33% goes to the Employee Pension Scheme, and 3.67% goes to the employee’s EPF account.
• Interest: the EPF interest rate is fixed by EPFO. For FY 2022-23, it is fixed at 8.1%.

To understand how to calculate EPF, let’s go through an example using the standard EPF calculation formula.

Employee’s basic salary + dearness allowance = ₹20,000

Employee contribution towards EPF = 12% of ₹20,000 = ₹2,400

Employer contribution towards EPF = 3.67% of ₹20,000 = ₹734

Employer contribution towards EPS = 8.33% of ₹20,000 = ₹1,666

So, the total contribution made towards the employee’s EPF account for a month = ₹2,400 (employee) + ₹734 (employer) = ₹3,134

Assuming the applicable interest rate is 8.25% per annum, the monthly interest rate becomes:
8.25% / 12 = 0.6875%

Let’s say the employee joined Company XYZ in April 2022. The contribution for April would be ₹3,134. Since EPF doesn’t pay interest in the first month, the total EPF balance in May 2022 would be ₹6,268 (₹3,134 + ₹3,134).

The interest earned in May would then be: ₹6,268 × 0.6875% = ₹43.08

This process continues each month until the employee’s retirement age (usually 60). The EPF calculator takes this recurring monthly contribution and interest accrual into account to show your final PF amount over time.

What is an EPF Calculator? 

An EPF calculator is a handy online tool that helps you estimate the maturity amount of your EPF savings. By entering details like your basic salary, monthly contribution, and tenure, the tool uses the standard EPF calculation formula to project your total corpus at retirement. Whether you're trying to understand PF in salary breakdown or planning long-term finances, an EPF calculator offers a quick and reliable estimate to guide your decisions.

Step-by-Step Guide on How to Calculate PF on Salary with an Example

To calculate EPF on salary, you will need the following information:

• Basic salary,
• Dearness Allowance,
• Duration of employment,
• Your current EPF balance (in any), and
• Existing EPF interest rate.

Once you have all the details, let’s follow these steps for PF calculation on salary:

Step 1: Calculation of Employee’s Contribution

This will be 12% of the salary (basic + dearness allowance). Suppose this salary amount comes to ₹20,000. Then the employee’s contribution will be 12% of ₹20,000, that is ₹2,400.

Step 2: Calculation of Employer’s Contribution

Employer’s contribution will be bifurcated into two parts: (i) ₹734 (3.67% of ₹20,000) to be added to the employee’s fund and (ii) ₹1,666 (8.33% of ₹20,000) which will be contributed to the Employee Pension Scheme.

Step 3: Calculation of Interest

On a total contribution of ₹3,134 (₹2,400 + ₹734), interest will be calculated at 8.1% p.a. Thus, the monthly interest amount will be computed as: ₹3,134 x 8.1%/12 months, which comes to ₹21.15.

If an existing balance exists in your EPF account, it will also be considered for computation of interest. The calculation is done for all the subsequent months similarly. 

The PF Calculation Formula (Simplified):

Employee PF Contribution = 12% × (Basic Salary + Dearness Allowance)
Total EPF Deposit = Employee Contribution (12%) + Employer EPF Contribution (3.67%) 

Benefits of PF Contribution

1. Retirement Savings: PF contributions serve as a retirement savings fund, ensuring financial security during old age.
2. Employer Contribution: Employers also contribute to the PF account, increasing the total savings pool.
3. Tax Benefits: Both employee and employer contributions to the EPF are eligible for tax deductions under Section 80C of the Income Tax Act.
4. Compound Interest: PF accounts earn compound interest, which helps in the growth of savings over time.
5. Loan Facility: Members can avail of loans against their PF balance for purposes like home buying, education, or medical emergencies.
6. Early Withdrawals: Partial withdrawals are allowed for specific needs like buying a house, medical treatment, or marriage.
7. Nomination Facility: Members can nominate family members to receive the accumulated PF corpus in case of the member's demise.
8. Transferable: PF accounts are portable and can be transferred when changing jobs.
9. Post-Retirement Income: Members can choose to receive a pension through the Employees' Pension Scheme (EPS) after retirement. 

PF Deduction Rules and Eligibility 

Who is Eligible? PF regulations generally apply to establishments with 20 or more employees. 

• Mandatory Deduction: PF is compulsory for employees whose Basic Salary plus DA is up to ₹15,000 per month. If you join a company with a salary above this threshold, PF enrollment is optional - but once you opt-in, you typically cannot opt-out while working with the same Employer. 
• Voluntary PF (VPF): Employees can contribute more than 12% through the Voluntary Provident Fund (VPF). However, the Employer's contribution remains fixed at 12% regardless of how much extra you contribute. 
• Minimum Salary Threshold: The ₹15,000 threshold is for mandatory coverage. Many companies extend PF benefits to all employees as part of their policy, regardless of salary level. 
• PF Withdrawal Rules: While PF is primarily designed as a retirement benefit, there are provisions for partial or complete withdrawal under specific circumstances, such as unemployment periods, housing needs, medical emergencies, marriage, education, etc. 

Tax Advantages of PF Contribution

Here are the key tax benefits of contributing to Provident Fund:

1. Tax Deduction under Section 80C: Employee contributions to the EPF are eligible for a tax deduction under Section 80C of the Income Tax Act, up to a maximum limit of ₹1.5 lakh per financial year. This reduces the taxable income, resulting in lower income tax liability.
2. Tax-Free Interest: The interest earned on the EPF contributions is tax-free. This means that the interest accrued on the PF balance is not subject to income tax.
3. Tax-Exempt Withdrawals: If an employee withdraws the PF balance after completing five continuous years of service, the withdrawal amount is tax-exempt. However, if the withdrawal is made before five years, it may be taxable.
4. No TDS on Withdrawals: There is no Tax Deducted at Source (TDS) on PF withdrawals if the withdrawal is made after five years of continuous service. 

PF vs. Other Salary Components 

It's important to understand that PF is just one of several statutory deductions. Another standard deduction is ESI (Employee State Insurance), which provides health insurance benefits to employees. However, ESI applies under different criteria and wage ceilings and is calculated differently from PF.
This guide focuses specifically on PF calculation - understanding how much goes into your monthly retirement savings and how that amount is determined.

How to Use a PF Calculator to Calculate PF on Salary

Manually calculating the PF on salary may be cumbersome.

But why go through the hassle when you can use Fi Money’s PF Calculator instead? With three easy steps, you can quickly get your total retirement corpus. Give it a try! 

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Want to Calculate PF interest? Read this blog to figure out how!

Conclusion

In conclusion, understanding how to calculate PF (Provident Fund) on salary is crucial for both employers and employees alike. It is not only a legal requirement but also a financial planning tool that helps individuals secure their future. By following the steps outlined in this blog, you can ensure accurate PF calculations - Whether you an employee looking to maximize your savings or master the art of PF calculation. And using a PF Calculator makes it easier to determine your PF contribution and retirement corpus.

Get a Salary Account with More Benefits Than Just PF!

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Frequently Asked Questions

1. What is the full form of PF in salary?

PF or Provident fund is a retirement savings scheme for Indian employees. The contribution is based on a fixed percentage of their salary. It helps determine how much is deducted from their monthly salary and what portion is being saved for retirement.

2. How is PF calculated on salary?

For EPF calculation on salary, begin by adding your basic salary and dearness allowance. Next, calculate your contribution, 12% of the above total. Then, determine your employer's contribution, typically 3.67% of your total salary. Finally, add both contributions together to obtain the total PF amount for your salary. 

Use our PF Calculator to calculate PF contributions on your salary.

3. What are the key components, rates, and rules involved in PF calculation on salary?

The key components of PF calculation are employee/employer contributions and interest. As per the rules, EPFO sets the interest rate, which is currently at 8.1%. While an employee contributes 12% of salary + DA, the employer contributes 3.67% to the employee's PF and 8.33% to Employee Pension Fund.

4. When will PF interest be credited?

While EPF contribution is credited to your EPFO account every month, the interest earned on for the year is credited at the end of the financial year.

5. How much PF is deducted from salary?

The PF deduction from your salary is typically 12% of the basic pay.

6. What are the benefits of using a PF calculator?

An EPF calculator is a helpful instrument for estimating the future balance in your EPF account upon reaching retirement. 

7. What is the PF contribution percentage in 2024? 

In 2024, the PF contribution percentages remain: 

• Employee contribution: 12% of Basic Salary + Dearness Allowance 
• Employer contribution: 12% of Basic Salary + Dearness Allowance 

The employer's 12% contribution is divided as: 

• 3.67% to employee's EPF account 
• 8.33% to Employee Pension Scheme (EPS) 
• Additionally, employers pay 0.5% for EDLI (insurance) and 0.5% for administrative charges 

Despite occasional discussions about potential modifications, these rates have remained unchanged since 1997. 

8. Is PF calculated on Basic Salary or Gross Salary? 

PF is calculated only on Basic Salary plus Dearness Allowance (DA), not Gross Salary.
Gross Salary includes many components like HRA, conveyance allowance, medical allowance, and other special allowances that are not considered for PF calculation. Your PF deduction is less than 12% of your total salary package.
For example: 

• If your Gross Salary is ₹50,000 but Basic Salary is ₹25,000 (with no DA) 
• Your PF contribution will be 12% of ₹25,000 = ₹3,000 (not 12% of ₹50,000) 

9. What is the minimum basic salary for PF deduction? 

There is no minimum basic salary threshold for PF deduction. However, there are essential rules regarding eligibility: 

• PF is mandatory for employees whose Basic Salary + DA is up to ₹15,000 per month in organisations with 20+ employees.
• For employees with a Basic Salary + DA exceeding ₹15,000, PF enrollment is optional at the time of joining. 
• Once enrolled in EPF, an employee cannot opt-out while continuing with the same employer.
• Many companies extend PF benefits to all employees as part of their policy, regardless of salary level.

The ₹15,000 figure is a threshold for mandatory coverage, not a minimum salary requirement. 

10. What is the PF salary limit? 

There is a statutory wage ceiling of ₹15,000 for mandatory PF contributions. If the salary is above ₹15,000, the contribution is then calculated on the total salary. 

11. Where can I check PF balance?  

You can check your PF balance through the EPFO website, the UMANG app, by sending an SMS, or by giving a missed call. If you have activated your UAN, you can also access your EPF passbook on the EPFO portal.