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Why is PF Contribution Important?

Provident Fund for Employees (PF), one of the most popular savings schemes launched by the Government of India, is governed by the Ministry of Labour. It is the primary scheme established by the Employee Provident Fund and Miscellaneous Provisions Act of 1952. The Employee Provident Fund Organisation (EPFO) manages the savings scheme.

The PF scheme aims to provide an individual with a sufficient retirement corpus. It instils the habit of saving money in salaried employees. The fund comprises monetary contributions from both the employer and the employee. Every month, they must contribute 12% of the employee’s basic salary (Basic + Dearness allowance) to this fund. When a person retires, they receive the entire PF contribution (from both the employee and the employer) as a lump sum with interest. EPFO determines the rate of return on investment. In addition, the interest earned is tax-free.

The Indian government has mandated participation in this scheme. As a result, it gets regarded as a low-risk investment because the government manages it. Let’s check out in detail how vital are PF contributions.

Contributions

Employees and employers both contribute equally to the employee provident fund. The employee’s base salary and dearness allowance determine the actual amount of EPF contribution. The PF contribution is 12% of their basic wage for most employees. The details of employee and employer contributions to EPF are as follows:

PF contribution of employees

Every month, the employer deducts 12 per cent of the employee’s salary (basic + dearness allowance) as an EPF contribution. This entire contribution gets deposited into the employee’s EPF account.

PF contribution of employers

Similarly, the employer contributes 12% of the employee’s salary to the EPF.

Contribution Rate for EPF in 2021

In some cases, PF contributions can be as high as 10%. For example, consider the following scenarios:

  • If a business has less than 20 employees,
  • The company suffers losses that exceed its total net worth.
  • A business involved in the beedi, brick, jute, guar gum, or coir industries.

In the case of female employees, the contribution can also vary. As per the union budget 2018-2019, new female employees can contribute 8% rather than 12%. This benefit is only available for the first three years of employment.

The primary reason for this revision was as follows:

  • To allow women to earn more money at home.
  • To encourage companies to employ more women to close the gender gap.

Even if a female PF contribution is 8%, the employer must maintain it at 12%. Employees can also contribute more than 12% to their EPF. The VPF stands for Voluntary Provident Fund (VPF).

It is important to note that your EPF account will remain active as long as you are a salaried employee. If you change jobs, you must update your EPF information with your new employer so that they can continue to contribute.

Implications of Employee Provident Fund Taxation

The PF contributions are tax-free. This fund gets taxed under the EEE (Exempt-Exempt-Exempt) regime. It means that no tax is levied at the time of contribution, interest accrual, or withdrawal at maturity if it is within a certain limit. There are, however, rules and exceptions to follow.

Contribution from the Employer

Employer contributions to EPF are tax-free up to a certain limit. According to the new budget 2020, a new limit on the employer’s contribution has been proposed.

So, as per the new proposal, the employer’s total contribution to EPF, National Pension Scheme, and superannuation fund should not exceed 7.5 lakh Rs in a fiscal year. If the total amount exceeds the proposed limit, the excess amount is taxable for the hands-on employee.

Contribution of Employees

Employee PF contribution and interest are tax exempt. A tax deduction of up to 1.5 lakhs can get claimed under Section 80C. If the amount from the PF is withdrawn at maturity, no tax is due. However, suppose the employee withdraws a portion of the funds due to an emergency. In that case, the employee will get taxed on the amount.

Withdrawal Tax

The withdrawal of an EPF balance is tax-free. There are few exceptions to the rule based on the number of years of employment.

What exactly is an EPF calculator?

The EPF calculator is a simulation that shows you how much money will accumulate in your EPF account when you retire. You can calculate the lump-sum amount, which incorporates both your contribution and the employer’s contribution, as well as the investment’s accrued interest.

The EPF calculator includes a formula box to enter your current age, basic monthly salary and dearness allowance, PF contribution, and retirement age up to 58 years. If you know the figures, you can enter the current EPF. The EPF calculator will show you the EPF funds available at retirement after entering the necessary information.

Conclusion

The Employee Provident Fund and Miscellaneous Provisions Act of 1952 governs EPF. EPF is an excellent savings plan for accumulating a sufficient retirement corpus for salaried employees.

Throughout a career, one may change jobs several times. However, the benefit of this scheme continuously gets added under UAN. A PF contribution can be a good investment strategy because it provides tax benefits. It ensures higher earnings and increases long-term savings for employees.

However, there are some limitations in PF contribution as well. An ELSS fund may be a better investment strategy or alternative (tax saver fund). An ELSS fund is a type of equity fund that assists investors in achieving inflation-beating returns for retirement. This tax saver fund attracts a lot of investors because it saves money on taxes and has a shorter lock-in period.

FAQs on PF Contribution

What is the mission of EPFO?

EPFO's mission is to provide Social Security to the country's workforce. It is the world's largest social security organisation, according to maps.

What exactly is UAN?

EPFO has implemented a 12-digit number known as the Universal Account Number for all employees with an EPF account (UAN). When transferring a PF account from one employer to another, this number is required.

What exactly is pf withdrawal form 31?

A PF withdrawal form 31, also known as a PF advance form, is used to withdraw funds or make a claim advance from an EPF account. Individuals are unable to withdraw funds as needed. Similarly, withdrawal is only available under certain conditions.

What exactly is PF Form 19?

Form 19 is a claim form that assists individuals in claiming their EPF balance.

About Author

Deeksha Arora is a Post Graduate from the Rajiv Gandhi National University of Law, Patiala, with a specialisation in Business Law.

She has a penchant for research and legal writing and wishes to pursue a career in academia.