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2019

All you need to know about Provident Funds in India

Provident Fund in India

As provident fund in India plays a major role in contributing the savings of the employee, it is the responsibility of all the citizens to understand the basic knowledge of provisions of the act. This article tries to explain the applicability, contribution rates, various methods for calculation of contribution, types of provident fund, taxability of contribution to various funds and so on.

Applicability of the Act:

  • To every establishment which is a factory engaged in any industry specified in Schedule I and in which 20 or more persons are employed and;
  • To any other establishment employing twenty or more persons or class of such establishments which the Central Government may notify.

An establishment to which this Act applies shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time falls below twenty. (Once applicable always applicable).

Types of Provident Fund:

There are different types of provident fund which has been set up by the different persons for different purposes, which has been categorized below:

1. Statutory Provident Fund:

  • It is the specific provident fund which is only meant for Government or Semi-Government employees, university or educational Institutions affiliated to a university established under the statute or other specified Institution.
  • This scheme is set up under the Provident Fund Act, 1925.

2. Recognized Provident Fund:

  • Any person who has employed 20 or more employees in an organization, is under an obligation to register himself under the Provident Fund Act, 1952.
  • In such a case, the employer has a choice to join the Government’s scheme or can start his own provident fund scheme after getting approval from Provident Fund commissioner and from commissioner of Income Tax.

3. Unrecognized Provident Fund:

  • It is a scheme where you don’t have an approval from the provident fund commissioner or from the commissioner of Income Tax.

4. Public Provident Fund:

  • It’s covered under the Public Provident Fund Act, Any public whether in employment or not, may contribute to public provident fund account.
  • Employees have an option to contribute to Public Provident Fund in addition to any of the funds specified above.
  • Minimum Contribution to the fund is Rs.500 and Maximum is Rs.1,50,000 per year.

The accumulated sum is payable after 15 years (it may be extended). The rate of interest carries to the fund is 8%.

Wage Limit for Contribution of Provident Fund:

  • Employees drawing basic salary up to Rs.15,000 have to compulsory contribute to the provident fund.
  • Employees drawing above Rs.15,000 have an option to become member of the provident fund.
  • Employee who while joining the organization has a basic salary above Rs 15,001 have an option to either become or avoid becoming member of Provident fund
  • Employees whose basic salary while joining the organization is less then Rs 15,001 but after some period of time their basic increases above Rs 15,001 have to compulsorily continue to be member of provident Fund (doesn’t have an option to terminate the membership form of the provident fund).

Contribution to the Provident Fund:

As per Section 6 the contribution which shall be paid by the employer to the Fund shall be 12% of Basic Wages + DA.

Components for Calculation of Contribution:

Provident Fund contribution is required to be made @ 12% on the ‘Monthly Pay’ which is understood as:

  • Basic wages (as defined in Sec 2(b) of the PF Act);
  • Dearness Allowance;
  • Cash Value of Food Concession;
  • any presents made by the employer;

 

Section 2(b) of the Act “Basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include:

  1. the cash value of any food concession;
  2. any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
  3. any presents made by the employer.

From the above definition it is clear that all the emoluments which are earned by an employee other than those specifically excluded components given under clause i, ii & iii of Sec 2(b) of the Act, would be the basic wages for the purposes of contribution under the Act.


Rates of Contribution:

Scheme Name Employee Contribution (%) Employer Contribution (%)
Employee provident fund (EPF) 12% 3.67%
Employees’ Pension scheme (EPS) --- 8.33%

Employees Deposit linked

Insurance (EDLI)

EPF Administrative charges

0% 0.5%
EPF Administrative charges 0% 0.85%
EDLIS Administrative charges 0% 0.01%
Total 12% 13.36%

Taxability of PF:

  • Withdrawal from EPF before the completion of five continuous years of service is taxable.
  • The five years of service can be completed either with one employer or more than one.
  • On the other hand, if you withdraw the money after the completion of five years of service, this amount will be exempt from tax.
  • The withdrawal from EPF before the completion of five years is taxed in the year of withdrawal.
  • PF contribution is made up of four components:
    • Employee's Contribution
    • Employer's contribution
    • Interest on employee's contribution
    • Interest on employer's contribution.
  • Out of these, three components - employer's contribution and interest earned on both the contributions are fully taxable.
  • In case of withdrawal before the completion of five years all the four components of EPF will be taxable.
  • Employee's own contribution to EPF is eligible for deduction under section 80C of the Income Tax Act.

 

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