Provident Fund is created to propagate the idea of saving a fraction of salary for financial security and stability. An individual can start his contributions in Provident Fund once he has started working at any establishment as an employee. These Provident Fund Contributions are on a monthly basis. Individuals have to pay a fraction of their salary every month towards PF contributions. This money that is saved can be used by the individuals in event of retirement or if an individual is no longer fit to work.
Let us now understand how the Provident Fund is calculated on salary. There are two important factors that are to be considered before understanding the calculations.
- EPF account: EPF stands for employee provident fund. This is the provident fund account wherein the funds of contributions made by the employee and employer are pooled.
- EPS account: EPS stand for Employee Pension Scheme. This is the account where the employer makes a fraction contribution out of the total fraction that is supposed to be contributed by the employer.
The fraction of provident fund that is deducted from the salary is 12%. This means that both employer and employee respectively contribute 12% to the Provident Fund account. It is important to note that the employee contributes the entire 12% of his salary fraction to the EPF account while the employer contributes only 3.67% in your EPF account and the remaining of 8.33% is contributed in your EPS account by your employer. Thus employers’ contribution of 12% is split into two parts: 3.67% in employees provident fund account and remaining 8.33% in employee pension scheme account.