Employee Provident Fund - A complete guide

Last udpated: Dec. 18, 2018, 3:12 p.m.

Every employee working in a company registered under Employees Provident Fund Organisation has to pay a certain amount of salary every month in his PF account. However, employees either do not understand the full concept of Provident Funds or find it very confusing.

This guide will help employees to understand every aspect of Provident Funds.

This article will guide you through various aspects of Provident Funds (PF) and help you to understand various topics in detail. Do not skip any of the section of this article, as PF is the only and best investment you make out of your salary to safeguard your retirement life. You will be walked through various aspects of PF such as:

  • What is Employees Provident Fund?
  • Who should Pay EPF and whether your money is safe?
  • How to make most out of your EPF investment?
  • How much EPF is deducted and how you can save higher amount?
  • What are the tax exemption?
  • When you can withdraw your PF balance?

These are some topics I have listed above. However, you will learn a more. This article will be updated from time to time to keep it relevant with latest updates.

What is Employees Provident Fund?

I bet, you were surprised when you saw your first payslip with PF deduction. Every fresher wonders how he got less money in his bank account than his agreed CTC.

Well, to make it simple, money you get in your bank account comes after many deductions such as PF, PT, and TDS.

TDS is your Income Tax liability that employers deduct and pay to government. PT is charged on employment in some states. Professional Tax (PT) is your direct expense.

However Provident Fund and TDS are not your expenses but you obligation is performed by your employer.

Now coming to main question, What is Provident Fund?

Provident Fund is a fund where Employees and Employers deposit certain amount every month which is intended to be used after retirement by employee.

I have provided the explanation in simple language.

Provident Fund is basically a fund where you deposit money from your salary and this deposited money can be used once you retire.

EPF or Employees provident fund was a milestone step taken by government. Government employees get pension after retirement, however private employees were left helpless after retirement. To make life secure and provide financial stability after retirement, the EPFO was launched.

The whole purpose of Provident Fund is to make your retirement life financially stable.

Intention and purpose of Provident Fund was always to help you after your retirement. So it is advised that during your job never think of withdrawing money from your PF account. You can go with other investment options for emergency purposes but never touch your PF account, as it is the only and true friend after your retirement.

Every month 12% PF is deducted from your basic salary amount and same amount is contributed by your employer. You can fix PF that should be deducted from your basic salary, however minimum you have to deposit is 1,800 (12% on 15,000) if your basic salary is higher than Rs. 15,000 per month.

Pro TIP: When you join a job, make sure that Employer's contribution toward PF is not included in your CTC.

Companies often include employers share in your CTC, as it is a direct cost for companies. However you can bargain and increase your CTC (Cost to Company) directly by discussing employers share. Even if employer includes PF contribution in your CTC, you can still bargain for 30% of share as company will get income tax benefit of this amount by claiming expense from its profits.

Who is suppose to Pay PF and money is safe?

Every employer has to get registered under PF if he is employing more than 10 people. So if your employer is registered under PF, then from your salary every month PF will be deducted and remitted along with share of employer.

Your money is absolutely safe. EPFO is the governing body and takes care of your money deposited. However you have to be on alert and make sure that your employer is depositing money timely and correctly.

You should always check your PF balance every month to ensure that employer has deposited correct amount.

If your money is correctly deposited in your account then you can be assured that it is safe and earning interest on it.

How to make EPF as your best investment option?

Provident Fund is a must have investment option in your portfolio. Those working have obligation to pay PF. Balance in your provident funds will give you satisfaction and hope of peaceful retirement life.

Though interest given on PF balance is lower compared to bonds but have less risk and performs better than fixed deposits.

You can manage your provident fund account along with other investments. If buying a house is your top property, then keep your PF deduction low but never take advance against your PF account.

You can plan your funds for retirement. Estimate how much money you will make from other investments and allocate accordingly to your PF account.

Though you have to pay minimum PF amount but you can lower your deduction if currently you are paying more than Rs. 1800 per month.

PF deduction and do you have any option?

PF will be deducted from your account, regardless of how much salary you get.

If your salary is more than Rs. 15,000 then 12% of 15,000 is minimum what has to be paid.

You have no option on rate of deduction, but you have option to choose amount on which PF should be deducted. Remember that equal amount of PF is also deposited by your employer. Your deduction of selecting amount on which PF should be deducted will directly affect your take home salary subject your CTC terms with employer.

However if your basic salary is higher than Rs. 15,000 then only you have option to specify amount for PF deduction.

Tax exemptions on PF

You get exemption under section 80C on your share of provident fund. You get benefit under section 80C, where you can deduct amount of PF deposited from your salary.

For example if your total salary was Rs. 6 lakhs in a year and you deposited PF of Rs. 24,000 then you can deduct 24,000 from your salary and tax will be calculated on remaining salary only.

If you withdraw your PF balance before completion of 5 years of service then your PF amount becomes taxable.

Investment in PF is exempted only if are not withdrawing balance before completion of 5 years of services. However tax will not be charged if have withdrawn funds from your PF account due to any of the following reaons:

  1. Termination of employment due to bad health.
  2. Due to closure of business
  3. Due to any reason not in hands of employee

Suggested Readings

How to take loan against PF balance?

How to check PF balance?

Posted by GST Payer under Investment

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