What is PF - Provident Fund Meaning, Working & Types

An Employee Provident Fund is a scheme that has been put in place for all salaried employees working in a corporate organization with 20 or more employees. The Employee Provident Fund Organization of India or EPFO has instructed all organizations to put a fraction of employees’ salaries into the provident fund.Also, the employers themselves are required to contribute their share to the provident fund. The main goal of the EPF scheme is to ensure that by the time the employee retires or is unable to work anymore due to disability, he or she shall have a sizeable fund in place. Read on to find out exactly how PF works .

Step 1: The EPF deductions are made from your salary

Everyone who has been a salaried employee knows that various deductions are made on our monthly salary. One such deduction is for the Employee Provident Fund, which is clearly specified on your salary slip. So, what exactly is the PF process ? According to the EPF rules, 12 percent of your salary must go towards your provident fund. Your company is also required to contribute the same 12 percent, out of which 8.33 percent of the salary is directed towards the Employee Pension Scheme or EPS. The remaining 3.67 percent are put into your EPF.

Step 2: All EPF funds are pooled

The collected funds from you and all other employees are pooled together and invested by a trust. The pooled funds also generate interest at a rate anywhere between 8 to 12 percent as decided by the government.This amount keeps growing due to your monthly contributions as well the yearly compound interest applicable. The EPF remains active till you decide to withdraw it after your retirement.

Step 3: Withdrawal of Employee Provident Fund

There are two main ways by which you can withdraw your provident fund.

• The first is after you attain the age of 58 years, which is the retirement age. After you’ve reached the retirement age, you can apply to withdraw your Employee Provident Fund via your company.
• The second way is to withdraw your EPF before your retirement age. This can be done if you have been unemployed for one whole month, in which you case you’re allowed to withdraw 75 percent of your provident fund. However, it is to be noted that employer’s contribution of the provident fund can only be withdrawn after 58 years of age.

Overall, the Employee Provident Fund scheme is a great way to save up some funds for your retirement. Apart from that, it also acts as an emergency fund in case you require money for health expenses, marriage or house loan payments.

One of the well-known savings programmes introduced with the help of the Indian government is the Employees' Provident Fund or EPF. The organisation was established in 1951 and is overseen by the Ministry of Labour and Employment, Government of India. The Ministry of Labour governs the EPF programmes in India. Employees' Provident Fund Organisation administers this savings plan. You may also refer to it as EPFO.This plan attempts to help an individual accumulate a sizeable retirement fund. It instils in salaried class workers the practice of saving money. Employer and employee contributions in the form of money are included in the fund. Each of them is required to make a monthly contribution to this fund equal to 12% of the employee's basic pay (basic plus Dearness Allowance).When someone retires, they are given a lump sum payment with interest that includes the whole contribution (from both the employee and the company). The rate of return is fixed and determined by EPFO. Additionally, the interest is tax-free.The Indian government has made contributions to this programme mandatory. Therefore, it is viewed as a low-risk investment because the government oversees it.A Provident Fund (PF) account number will be given to each employee by a company that has registered with the EPFO. An alphanumeric code makes up the PF number. It stands for the establishment, state, regional office, and PF member code. The PF number is managed by the PF trust.Members of the PF are given a Universal Account Number (UAN) , which is a special number. The PF account number changes whenever an employee switches jobs. However, the UAN number does not change.

The EPF is funded equally by the company and the employee, as was already stated. To calculate the real EPF contribution, base pay, as well as dearness allowance, are taken into account. The typical employee contributes 12% of their base salary to the pension fund. The information on employee and employer contributions to EPF is provided below:

1) Employees' EPF contributions

As EPF contributions, the employer deducts 12% of the employee's base salary plus the dearness allowance each month. The entire contribution is deposited into the employee's EPF account.

2) Employer's EPF contributions

Similar to how employees contribute to EPF, employers similarly contribute 12% of employee salaries.The following categories apply to the employer's contribution. The percentages of the employer's contribution are listed below.

• Employees Provident Fund: 3.67%
• EPF Administrative Fees: 1.1%
• EDLIS Administrative Fees: 0.01%
• Employee Pension Plan: 8.33%
• Employee Deposit Link Insurance Scheme: 0.5%

EPF contributions, though, may occasionally be 10%. This may mean, for example, under the following circumstances:1) If a business employs fewer than 20 people.2) If a business has ties to the coir, brick, jute, or guar gum beedi sectors of the economy.3) The business has losses that exceed its whole net worth.4) Female employees may make a different contribution, too. The union budget for 2018–2019 states that new female employees can make 8% rather than 12% contributions to their EPF.Only the first three years of employment are eligible for this benefit. This revision's main justification was:1) Encourage more women to work in business in order to close the gender pay gap.2) Even though a woman participant's EPF contribution is only 8%, the employer must nevertheless make a 12% contribution. However, an employee can contribute more than 12% to EPF. This will go towards the Voluntary Provident Fund.3) To provide women access to larger after-tax income.It is significant to remember that EPF will remain active as long as you have a salaried job. It is crucial to update your EPF details with your new employer if you change employment so they can continue to contribute.

A specific amount is deposited into the PF account each month. This sum accrues interest and grows into a sizable corpus. When a person's job ends, a sizable sum is put into their EPF account to support them with their financial requirements during retirement.The retiree may withdraw 100% of the corpus at age 58. If they are 54 years or older, they can choose to withdraw 90% of the EPF corpus before they have completed one year of retirement. Even though the EPF is thought of as a retirement savings plan, funds may be withdrawn under certain conditions.

Premature withdrawal in a time of crisis

In the event of a dire financial situation, premature PF withdrawals are also permitted. Only when five years have passed since the end of one's service is it possible to withdraw. The following situations allow for partial withdrawal:1) Higher learning2) Wedding3) Purchasing land or your house4) Purchase of a land/house5) Health emergency6) Home renovations

Withdrawal because of unemployment

When switching jobs and experiencing unemployment, EPF withdrawal is also an option. One may withdraw 75% of their PF corpus to cover costs if they quit their job and are unemployed for a month after doing so.One may withdraw the remaining EPF amount if they are unemployed for longer than two months. This option is available at any time in the event of unemployment. Before taking an EPF withdrawal, there is no requirement that a certain number of years have passed.As a result, these withdrawals may be requested using the various composite forms that are offered on the EPFO e-portal.

One of the most well-known and significant savings programmes available to all salaried class workers in India is the EPF programme. The advantages of this plan are as follows:

Tax-Saving Programme:

Both the investment sum and interest income are tax-exempt. If the accumulated money is taken out after five years, then it is also still tax-free. However, if a withdrawal is made too soon (prior to five years), then the employee will be responsible for paying taxes on it.

Capital Appreciation:

The Indian government sets the interest rate for this programme. Monthly contributions are made to this fund. Therefore, making a single large investment is not a hardship for the employee. The compounding effect helps in building a sizable corpus at retirement age as the money and interest keep accruing.

Retirement Fund:

This plan contributes to the long-term development of a sizeable retirement fund. The corpus contributes to the retired employee's sense of independence and financial stability.

Financial Crisis:

This collected fund can cover any unforeseen life events. The employee may take a partial withdrawal from this fund in special circumstances.

Unemployment:

This fund may be utilised to cover the employee's expenses in the event of job loss. After one month of unemployment, 75% of the accrued fund may be withdrawn. Upon completing two months of unemployment, the remaining 25% of the fund may be taken.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.