PF (Provident Fund) - What it is, how it works and more

Everything about Provident Fund (PF)

Investments tend to have a three-pronged stance. The purpose of many investment tools is to create savings, grow your wealth, and maintain a source of income during your retirement years. There are, of course, various tools of investment that can fulfill each of these three purposes separately.

But there is one type of investment that can fulfill all three purposes simultaneously. It’s called a Provident Fund or PF.

While it’s a universal concept, what is PF?

A provident fund or PF is a government-managed retirement and savings scheme. The idea is that a certain amount of money is invested in this scheme voluntarily from savings or mandatorily from an individual’s salary. In essence, a provident fund aims to ensure that an individual has financial backing and security once their working years have ended. Hence, this money is locked up for a certain period.

Since the idea is to provide for a corpus post-retirement, withdrawals from this scheme are discouraged before the specified period. It is only when you retire or under special circumstances that you can use the funds from your provident fund account. These special circumstances include medical emergencies, purchasing a house, higher education, etc.

Types of provident funds

To understand what a provident fund is and its benefits, you will need to know the types of provident funds available as an investment option.

General Provident Fund

As a long-term investment option, the General Provident Fund (GPF) can only be used by employees who are employed temporarily or permanently by the Government of India.

Being a type of PF account, the same rules apply. Every month, a percentage of the employee's salary is deducted and invested into the account. While a certain threshold is set and deducted mandatorily, increasing this amount is an option that can be exercised when it comes to deciding on the percentage of deduction.

The threshold set currently is 6% of the basic pay. Increasing this amount is possible for employees, and they have the option of a 100% contribution from their basic pay. The contributed amount accrues throughout their service. It is only upon retirement that the accrued investment amount is paid back to the employee.

The eligibility criteria to open a GPF account is as follows:

• Temporary employees who have been in service continuously for one year
• Employees who have been re-employed post their retirement
• All permanent employees

The maturity period or tenure of a GPF account is the retirement of the employee. However, if the funds have to be withdrawn prematurely, the employee should have completed at least 10 years in service. If the employees choose to leave their job before retirement, they can withdraw the money from their GPF account.

Public Provident Fund

A public provident fund is another type of provident fund account. The primary goal of a PPF, other than creating savings, is safeguarding the principal amount while compounding the interest on it. It offers a considerably high rate of interest on the principal amount when you look at other savings instruments.

Once the initial investment in a PPF has been made, the minimum tenure is 15 years. Post that, the individual has the option of extending it for every 5 years. It isn’t very difficult to open a PPF account. You can open a PPF with just Rs. 100.

Once the account has been opened, the minimum amount that can be invested is Rs. 500, and the maximum limit is Rs. 1,50,000 every financial year. Once an account has been opened, you will need to invest some money in your PPF account at least once a year. The amount you invest in your PPF can be deducted from your income under Section 80C of the Income Tax Act, 1961. Moreover, the interest earned on your investments in a PPF account is exempt from Income Tax.

PPF can be a suitable investment option for individuals looking for a risk-free investment tool that provides high returns.

Recognized Provident Fund

Privately owned companies that have more than 20 employees can apply for a recognized provident scheme. This type of provident fund scheme falls under EPFO rules.

For a company to establish a recognized provident fund, it should be approved by the Commissioner of Income Tax.

What are the benefits of a provident fund

• You can claim a tax deduction of up to Rs 1,50,000 under Section 80C for provident fund investments.
• It acts like a savings cum retirement corpus, thus helping to create a financial backup fund.
• There is nearly no risk to the principal amount as it is a government-backed scheme.
• You can partially withdraw the funds from your PF account in case of an emergency.
• Employees can choose to transfer their provident fund account if they change their jobs.

Employee's Provident Fund Eligibility

Many times, you may see a PF deduction in your salary slip. What is PF in salary? The PF you see and hear about in your salary is the Employee Provident Fund.

To be enrolled in the Employee Provident Fund Scheme (EPF), the employee and the organization both will need to meet the below eligibility criteria:

• As per the law, any company with more than 20 employees should be registered with EPF, so that the employees can enjoy provident fund benefits
• If there are less than 20 employees, then it can be voluntary registration
• For a salaried employee to register and open an EPF account, their basic salary plus dearness allowance should be less than Rs. 15000
• For employees earning more than Rs. 15000, they will need to be granted permission from their employer and the Assistant PF Commissioner.

Provident Fund Contribution

The contributions of PPF and EPF are different. In the case of the Employee Provident Fund, the contribution is made by the employer and the employees. Hence, the contribution is bifurcated among both parties.

• Contribution from Employer: The employer will contribute 12% to the EPF account. Of this 12%, 3.67% forms a part of the Employee Pension Scheme, and 8.33% forms a part of the Employee Provident Fund scheme. There are some additional charges applicable to the contribution as well.
• Contribution by the Employee: The employee will contribute 12% of the basic salary to the EPF account.

Let’s look at an example:

Mr. A works with a company that has 50 employees. Out of his total monthly salary of Rs 25,000, Rs 14,000 is his basic salary. So, his EPF will be calculated at Rs 14,000.

Employer contribution = Rs 14,000 * 12% = Rs 1960
Employee Contribution = Rs 14,000 *12% = Rs 1960

So, the total contribution per month will be Rs 3920.

When it comes to the Public Provident Fund, the contribution is made only by the individual. They can contribute any amount from Rs 500 to Rs 1,50,000 per financial year.

Provident Fund FAQs

What is a Provident Fund and how does it work?

A provident fund is a government-backed scheme that aims to provide financial security during an individual’s retirement or non-working years.

To know how PF works, it is necessary to know what type of PF account you choose to operate. If an individual has chosen to invest in a Public Provident Fund account, they can invest up to Rs 1,50,000 per financial year. The minimum amount that can be invested every year is Rs 500.

In the case of an EPF or Employee Provident Fund Account, the employer and the employee will both contribute a certain percentage of the employee’s basic salary to the EPF account.

Who is eligible for PF?

Any individual can open a PPF account. You can also open a PPF account on behalf of a minor. In the case of EPF, any organization that has more than 20 employees needs to register for EPF compulsorily.

Can I check my PF balance online?

Yes, you can check your PF contribution online. You will receive a Universal Account Number upon opening an EPF account.

• Visit the EPFO portal.
• To log in, you will first need to register and activate the UAN number.
• Choose your Member ID and click on “View Passbook”.
• You can download the passbook as well

When can I withdraw my PF?

If you have chosen to invest in a PPF account, you can withdraw your funds after completing the 15-year tenure. However, you also have the option of withdrawing the partial amount after completing 7 years. If you want to withdraw the funds from your EPF account, you will need to wait till you retire or leave your current job.