What is Provident Fund and how is it calculated in India?

Provident Fund (PF) is a savings scheme that is primarily intended to provide financial security and stability for employees after retirement. It's managed by the Employees' Provident Fund Organization (EPFO) and is a mandatory benefit for employees working in organizations with 20 or more employees. 


Key Components of Provident Fund:

  1. Employee's Contribution: Typically, employees contribute 12% of their basic salary to the PF. This amount is deducted from their monthly salary.
  2. Employer's Contribution: Employers also contribute 12% of the employee's basic salary. However, the employer’s contribution is split into two parts:
    • 3.67% goes into the Employees' Provident Fund (EPF) account.
    • 8.33% goes into the Employees' Pension Scheme (EPS), which is meant to provide pension benefits post-retirement.
  3. Interest on PF: The EPF balance earns interest, which is credited to the account annually. The interest rate is set by the government and can vary from year to year. The Employees Provident Fund (EPF) interest rate for the financial year 2023-24 is 8.25%. This rate is applicable to EPF deposits made between April 2023 and March 2024.


How is Provident Fund calculated from Employee's salary?


Provident Fund is calculated at a rate of 12% of either the actual basic salary of the employee or the statutory basic salary of INR. 15000 per month. Both calculations are correct and compliant as well. The selection of the contribution often depends on the company's existing contribution policy as well as mutual discussion between employee and employer.


The employer matches the contribution in both cases.


Example of PF Calculation


Scenario 1 - Contribution on Actual Basic Salary


Employee A earns a gross salary of INR. 100,000 per month. His provident fund contribution will be:


Basic Salay = INR. 100,000/2 (50% of Gross Salary) = INR. 50,000

Provident Fund = INR. 50,000 * 12% = INR. 6000 per month.


Scenario 2 - Contribution on Statutory Basic Salary


Same employee A earns a gross salary of INR. 100,000 per month. However, his PF is to be calculated at 12% of statutory basic as per the company norms. His provident fund contribution will be:


Basic Salary = INR. 100,000/2 (50% of Gross Salary) = INR. 50,000 per month

PF basic salary / Statutory basic salary = INR. 15,000

Provident Fund = INR. 15,000 * 12% = INR. 1,800 per month.


Employers can take an informed decision basis the above calculation and finalize the monthly provident fund calculation to make sure both the employer and the employee understand the same and agree to the calculation logic.

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