What is Provident Fund (PF)?
Provident Funds – PF are a retirement savings scheme introduced by the government which aims to provide financial security to the investor for future after his retirement. A PF account can be opened individually as Public Provident Fund (PPF) and also by the employer as Employee Provident Fund (EPF) where both the employer and employee deposit a share of the income. Apart from these, there are other types of Provident Funds as well.
One can also keep an eye on their PF Balance without any help of employer as there are several apps to facilitate the same. Withdrawal from provident fund account is permitted only after the expiry of maturity period.
Types of Provident Funds:
- Recognized Provident Fund
- Unrecognized Provident Fund
- Statutory Provident Fund
Recognized Provident Fund:
Recognized Provident Fund (RPF) is a fund which has been recognized and governed by certain laws of government. Two funds fall under the Recognized Provident Funds category- Public Provident Fund (where a person deposits money in a PF account on his own will) and Employee Provident Fund wherein both the employer and employee deposit money into the employee’s account.
Public Provident Fund
PPF scheme is governed by the provisions of Public Provident Fund Act, 1968. The deposits made towards the PPF account can be claimed as a deduction under the Income Tax Act and the interest earned on these schemes is tax free. Any individual who is a resident of India can open a PPF account. He can be salaried or self-employed, or even a student. Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not permitted to open an account, however. The minimum amount of deposit is INR 500 p.a. Any contribution made by the account holder towards PPF, interest earned and amount received on maturity are exempt from tax.
Following are the features of PPF account:
- PPF accounts can be opened with any post office. It can also be opened at specified public sector banks such as SBI, PNB, etc. or private sector banks such as ICICI, Axis bank, etc.
- The account can also be opened by a parent on behalf of minor.
- Since, the NRIs are not the residents of India; they are not eligible for opening a PPF account.
- Only one account can be opened by one person i.e. multiple accounts are not permitted.
- Depositor is required to make a minimum deposit of INR 500 every year. The maximum limit of deposition in any financial year is INR 1.5 Lakhs.
- In case the minimum amount is not deposited in the PPF account in any year, the account becomes inactive.
- Deposits can be made via cash, cheque, DD or online transfer.
- PPF is a fixed income investment.
- The interest rate on PPF account is notified by the central government.
- The interest rate on PPF account is notified by the central government. Currently, the rate specified as notified by the central government on October 1, 2016 is 8% p.a. compounded annually.
- PPF account matures after the expiry of 15 years from the end of the financial year in which the account was opened.
- Any contribution made by the account holder towards PPF account is exempt from tax. It includes the amount invested at the time of opening the account or the contributions made during the tenure of the account.
- The interest earned on PPF account is exempt from tax under section 10(11) of the Income Tax Act.
- Amounts withdrawn from PPF accounts or amount received on the maturity of the account is exempt from tax.
- The Public Provident Fund account can also be used to obtain loan facility. This facility to avail loan against the PPF account is available from 3rd financial year upto 6th financial year.
- The interest rate payable on loan taken against PPF account is 2% higher than the prevailing interest rate on PPF account.
- The loan taken against PPF account can be repaid either in lump sum or in installments within the period of 36 months.
- The PPF account can be transferred from bank to post office or vice versa. It can also be transferred between different branches of the same bank.
- Premature withdrawal (of PPF account is not permitted except in case of specified circumstances.
- In case of death of PPF account holder, the proceeds of PPF account can be claimed by the nominees/ legal heirs.
- If the subscriber wants to continue his subscription of PPF account beyond the period of 15 years, he can do so by extending the subscription for another period of 5 years. The extension can be with contribution or without contribution.
Employee Provident Fund
An Employee Provident Fund (EPF) functions as per the provisions of the Employees Provident Fund Act, 1952. It is applicable to an organization that has 20 or more employees. However, other organizations can also opt for this scheme voluntarily. The organization can either join a government approved scheme or employer and employee can together start a PF scheme by forming a trust. All Recognized Provident Fund Schemes should be officially approved by The Commissioner of Income Tax (CIT).
Contribution of the employer to the extent of 12% of salary is exempt from tax; any contribution beyond this 20% is taxable under the Income Tax Act in the year of contribution. Employee’s contribution to EPF can be claimed as a deduction under section 80C of the Income Tax Act. Interest income earned up to 9.5% is exempted from tax. Interest exceeding 9.5% will be charged to tax in the case of salaried employees.
Amount received on redemption is exempt if any one of the following conditions is satisfied:
- If the employee has left the job after service of 5 or more years (in case of multiple jobs, total period of service shall be considered), or
- In case the service period is less than 5 years, the termination of the employment is either due to ill health of the employer or the business has been discontinued, or
- In case of re-employment the balance of RPF is transferred to the RPF of the new employer.
If the above conditions are not satisfied, the amount not tax earlier shall be taxed and the deduction claimed under section 80C of the Income Tax Act shall be withdrawn.
There are three schemes for employee benefit by Employee Provident Fund Organization:
- Employee Provident Fund
- Employee Pension Scheme
- Employee Deposit Linked Insurance
Employee Provident Fund: Following are the features of Employee’s Provident Fund Account:
- An employee and his employer, both need to contribute 12% of basic salary + dearness allowance (if any) into EPF Account.
- The entire 12% of employee’s contribution credited into EPF account, while 3.67% of employer’s contribution (out of 12%) credited into EPF account & 8.33% credited into employee Pension Scheme (EPS).
- One can voluntarily opt for contributing more than 12% towards EPF
- Presently annual interest rates on these funds are @8.75%, which is on the official website of EPFO.
- Partial withdrawal of EPF is permitted for the purpose of:-
- Marriage or education of self, siblings, or children.
- Emergency medical expenses for self, spouse, children, or dependent parents.
- Repaying housing loans for a house owned by self, spouse, or jointly by both. One can do this only after 10 years of service and contribution to EPF.
- Paying the costs of alterations/repairs to existing home. For this, you need to be in earning and contributing from at least 5 years.
- If one has completed 7 years of service, he /she can withdraw 50% of his/ her EPF contribution up to 3 times in working life.
- Each EPF account holder is provided with a 12 digit UAN number. This number does not change with the change in jobs and PF subscriber can use it to view all accounts held by him with different establishments.
- In the event of defaulted payment of the PF contribution penalty is payable by the employer at the prescribed rate (percentage of PF contribution).
Employee Pension Scheme (EPS): The objective of this scheme is to provide regular pension to the employee post retirement. Contribution to this fund is made by the employer and the Central Government. No contribution is made by the employee. Employer’s contribution is 12% of Basic salary + DA, the contribution is divided into 2 parts; 3.67% for EPF and 8.33% for EPS. Employees who are enrolled for EPF scheme are automatically enrolled for EPS scheme. Central government also contributes 1.16% of Basic salary + DA.
The maximum basic salary that can be considered is INR 6500/-. No interest is paid on the accumulated fund. Employees can receive only pension from EPS. However, to be eligible to claim pension under this scheme, the employee should have completed at least 10 years of service and must have attained the age of 50 years for early pension and 58 years for regular pension. The pension is received lifelong and passes to two children & spouse after death.
Employee Deposit Linked Insurance (EDLI): This scheme was introduced in 1976 to provide insurance cover to the members of Employees Provident Fund. All employees who subscribe to the EPF scheme are automatically enrolled in the EDLI scheme. Unlike other insurance policies, individual factors such as age affect the eligibility of the employee under this scheme. The amount of coverage is directly linked to the salary of the employee. Claim amount under this scheme is 30% of salary calculated as Basic salary + D.A.
Contribution to this scheme is made only by the employer. The contribution of the employer is 0.50% of the employee’s basic salary. The amount payable can be claimed by the nominee. In case if no nominee is appointed, the amount can be claimed by the surviving members of the family.
Unrecognized Provident Fund
Unrecognized Provident Fund is a fund that is not recognized by Income Tax. Such fund is created jointly by employer and employees, however, approval for the same cannot be obtained. The contribution of employees to such Unrecognized Provident Fund is not deductible under section 80C of the Income Tax Act. However, the amount contributed by the employer is not taxable.
The interest earned on such scheme is exempt from tax. The tax implications of the amount received on retirement or termination can be divided into two parts, employer’s contribution, interest earned on such contributions and interest earned on the employee’s contribution is taxable as salary income; employee’s contribution is not taxable.
Statutory Provident Fund
Statutory Provident Fund is the fund created for government or semi government employees, university or educational institutions affiliated to a university established under the statue or other specified institution. This scheme is governed by the provisions of Provident Fund Act, 1925. The contributions made by the employer, interest earned under this scheme and amount received at the time of maturity are exempted from tax. Further, the contributions made by the employee can be claimed as a deduction under section 80C of the Income Tax Act.
How to check the Provident Fund Balance?
One needs to have activated Universal Account Number (UAN). It is registered with EPFO. One can get details of the PF balance by sending an SMS to 7738299899. Alternatively, one can also give a missed call at 011-22901406 from your registered mobile number. After placing a missed call, you will receive an SMS providing you with your PF details. m-sewa app of EPFO can also be downloaded and logged in to know the Provident Fund balance.
Provident Fund Withdrawal
PF money can be fully withdrawn only after retirement and not when working except under some conditions. If a person is unemployed, he can withdraw 75% of the PF deposit after one month of unemployment and remaining 25% after two months. PF can be withdrawn 2 or 3 times on non-refundable basis. One can also borrow PF Advance that is refundable for maximum six months gross pay. Form 31 UAN must be submitted to Employee Provident Fund Organisation (EPFO) for withdrawal or advance that must contain details like Universal Account Number (UAN), Permanent Account Number (PAN), date of joining and leaving,etc. Form 10C must also be applied along with Form 31 if one also wants to withdraw pension amount. There are separate forms as both are managed by separate bodies – Employee Provident Fund Organisation (EPFO) and Employee Pension Scheme (EPS). EPF complete withdrawal Form 19 is to be duly filled and submitted to EPFO for full withdrawal after retirement.
PF Withdrawal Procedure Online
- One needs to login to UAN Member Portal with UAN and Password
- Click on ‘Online Services’ from the top menu bar and select ‘Claim Form 31, 19 and 10C’ from the drop down menu
- Verify your bank account and proceed to ‘Claim Online’
- Click on ‘PF Advance Form 31’ and fill in the details in a new form that opens up if it advance or withdrawal before retirement. The employer needs to approve the withdrawal request. Click on ‘Form 19’ for full withdrawal after retirement
- Once done, SMS is sent to registered mobile number with UAN and the money is usually credited in 15-20 days to your account from PF account
- EPF withdrawal status can be checked by logging into UAN account and selecting ‘Track Claim Status’ in ‘Online Service’
PF Withdrawal Procedure Online
One needs to claim Composite Form (Form 31, 19 & 10C) which serves the purpose of three forms when applying offline.
Provident Fund Calculator – How to Calculate PF balance?
Provident Fund Balance is calculated adding the contribution of both the employer and employee. 12% of the salary that is contributed by the employer and 3.67% by the employee. Whether the 12% contribution by employer is to be calculated on basic pay or gross salary depends on basic pay of the employee. If the basic pay is less than Rs.6,500 then It is to be calculated on gross salary. If basic pay is higher than Rs.6,500 then it can be calculated on basic pay. It is also to be noted that PF is to be calculated on the actual earned amount and not that is declared in job offer. For instance, one works and gets paid for half a month then PF must be calculated on the half month salary keeping the conditions same for the PF calculation that whether it is to be calculated on gross salary or basic pay.