How PF (Provident Fund) is Calculated on Salary

Want to know how pf if calculated? Get detailed information for how much pf is deducted on salary, PF interest calculation and how investing in PF can save you on taxes.
Calculate PF
3 mins
27 March 2024

A Provident Fund is a popular instrument used to accumulate savings for long-term investment goals. To calculate your Employee Provident Fund (EPF) contribution, add both employer and employee contributions. The employer contributes 12% towards the PF balance, whereas the employee contributes 3.67% towards the PF balance.

While your EPF contributions are largely determined by your job, you have more flexibility with fixed deposit. You can choose your investment amount, tenure, and interest payout frequency, according to your financial goal.

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Here is how you can calculate your PF balance

The employer's contribution of 12% towards the PF balance depends on the employee's basic pay. For employees with basic pay less than Rs. 6,500, the calculation is made basis the gross salary. However, if the basic pay exceeds Rs. 6,500, the same calculation is made based on the basic pay.

If you are looking to calculate the sum you have accumulated in PF, consider using an Employee Provident Fund calculator, which will need the following information:

  • Your present age and tentative age of retirement
  • Basic monthly salary, along with expected annual increment
  • Your contribution towards the PF and expected employer contribution
  • The interest rate earned on EPF balance

On entering these details, find out how much you will save by the time you retire. While these may not be accurate figures, you may be able to estimate your retirement corpus based on this information.

How is EPF calculated?

To determine how much money should be put into each employee's EPF account, the government has established various rules. In essence, each employee's Provident Fund in a corporation consists of two contributions. Both the employers and the employee's individual contributions.

Let us try to understand the basics of PF calculation and the contributions made by the employee and the employer.

Employees contribute 12 percent of their basic pay plus DA to the EPF.

Employer's EPF contribution is equal to 12% of basic pay plus DA.

The employer's contribution of 12 percent is split into two parts: 8.33 percent goes to the employee pension plan (EPS) and 3.67 percent goes to the Provident Fund.

The below table will help you understand it better:

Employee basic salary and dearness allowance is Rs. 14,000.

 

EPF

EPS

Employee contribution

12% * 14,000 = Rs. 1,680

 

Employer contribution

3.67% * 14,000 = Rs. 514

8.33% * 14,000 = Rs. 1,166

Total

Rs. 2,194

Rs. 1,166


What is the formula for EPF calculation?

The formula for calculating EPF (Employee Provident Fund) contribution in India is as follows:

EPF contribution by employee = basic salary + dearness allowance x 12% PF contribution by employer = basic salary + dearness allowance + (12% of basic salary + dearness allowance)

Note: The above formula assumes that the employee is not covered under the EPF pension scheme. If the employee is covered under the pension scheme, the contribution will be different.

Also, please note that the maximum amount that can be deducted towards EPF contribution is 12% of the basic salary plus dearness allowance. The maximum amount that can be contributed by the employer is 12% of the basic salary plus dearness allowance, subject to a maximum limit of Rs. 15,000 per month.

How is interest being calculated in EPF?

The interest on EPF (Employee Provident Fund) contributions is calculated on a monthly basis based on the following formula:

Interest = (opening balance at the beginning of the year + contributions during the year) x interest rate / 12

Where,

  • Opening balance: The EPF balance at the beginning of the financial year (April 1)
  • Contributions: The total EPF contributions made during the financial year (April 1 to March 31)
  • Interest rate: The interest rate declared by the government for that financial year

The interest rate on PF is declared by the Government of India every year. The current interest rate for the financial year 2022-23 is 8.50%. The interest earned is added to the EPF account at the end of each financial year.

It is important to note that interest is calculated on the monthly running balance of the EPF account, and not on the annual contributions made by the employee and employer. This means that the longer the funds remain invested in the PF account, the higher the interest earned.

Tax advantages for payments to EPF

There are several tax advantages associated with contributions to EPF (Employee Provident Fund) in India. These tax benefits are available to both employees and employers, as follows:

Tax benefits for employees:

  • Contributions made by the employee towards EPF are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. The maximum deduction allowed is up to Rs. 1.5 lakh per annum.
  • The interest earned on EPF contributions is tax-free and not included in the taxable income of the employee.
  • Withdrawals made from EPF after 5 years of continuous service are tax-free.

Tax benefits for employers:

  • Contributions made by the employer towards EPF are eligible for tax deduction under section 36(1)(iv) of the Income Tax Act, 1961, as a business expense.
  • Contributions made by the employer towards the pension scheme of the EPF are also eligible for tax deduction under section 36(1)(iv) of the Income Tax Act, 1961.

It is important to note that if an employee withdraws the PF balance before the completion of 5 years of continuous service, the withdrawn amount will be subject to taxation. In such cases, the amount withdrawn will be added to the taxable income of the employee and taxed as per the applicable tax slab.

Therefore, EPF offers several tax advantages to both employees and employers, making it an attractive investment option for long-term savings and retirement planning.

What is EPF eligibility?

EPF (Employee Provident Fund) eligibility refers to the criteria that an employee must meet to be eligible for contributing to the EPF scheme in India. The eligibility criteria for PF are as follows:

  • Employee status: Only salaried employees are eligible to contribute to EPF. Self-employed individuals and freelancers are not eligible.
  • Age limit: There is no age limit for contributing to EPF. However, employees who are above 58 years of age and have completed 10 years of service can withdraw up to 100% of their EPF balance.
  • Basic salary: Employees with a basic salary of up to Rs. 15,000 per month are eligible to contribute to EPF. However, employees with a higher basic salary may also contribute voluntarily.
  • Nature of employment: EPF eligibility also depends on the nature of employment. Any employee who is employed by an organisation that is covered under the EPF Act is eligible to contribute to EP.
  • Continuous service: An employee must have completed at least one month of continuous service to be eligible to contribute to EPF. However, an employee can also be eligible for EPF from the first day of joining a new organisation if the organisation has more than 20 employees.

Overall, EPF eligibility criteria are designed to ensure that salaried employees in India can contribute to the PF scheme and secure their retirement. It is important to understand the eligibility criteria and make regular contributions towards EPF to ensure a comfortable retirement.

Important things to consider for EPF

If you are an employee in India, EPF (Employee Provident Fund) is an important retirement Savings Scheme that you should consider. Here are some important things to consider for EPF:

  1. Eligibility: All salaried employees in India earning a basic salary of up to Rs. 15,000 per month are eligible to contribute to EPF. However, employees earning more than Rs. 15,000 per month may still choose to contribute voluntarily.
  2. Contribution: Both the employee and employer contribute 12% of the employee's basic salary plus dearness allowance towards EPF. The maximum amount that can be deducted towards EPF contribution is 12% of the basic salary plus dearness allowance, and the maximum amount that can be contributed by the employer is 12% of the basic salary plus dearness allowance, subject to a maximum limit of Rs. 15,000 per month.
  3. Withdrawal: Withdrawals from EPF can be made after 5 years of continuous service, subject to certain conditions. Partial withdrawals can also be made for specific purposes, such as marriage, education, or medical emergencies.
  4. Tax benefits: Contributions made by the employee towards EPF are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. The interest earned on EPF contributions is tax-free and not included in the taxable income of the employee. Withdrawals made from EPF after 5 years of continuous service are also tax-free.
  5. Nomination: It is important to nominate a beneficiary for your EPF account, as it helps to ensure that your savings are transferred to your loved ones in case of your untimely demise.
  6. Keep track of your EPF account: It is important to keep track of your EPF account and ensure that your contributions and interest are being credited properly. You can check your EPF balance and transaction history online through the EPF website or mobile app.

Overall, PF is an important retirement Savings Scheme that offers several benefits to employees in India. It is important to understand the rules and regulations of EPF and make regular contributions towards it to ensure a comfortable retirement.

Benefits of investing in the EPF

There are several benefits of investing in the EPF (Employee Provident Fund) scheme in India, some of which are:

  1. Retirement savings: EPF is a retirement Savings Scheme that helps employees save a portion of their salary every month towards their retirement. The EPF corpus can be used as a source of income during retirement and can provide financial security to employees
  2. .Tax benefits: Contributions made by employees towards EPF are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. The interest earned on EPF contributions is also tax-free and not included in the taxable income of the employee. Withdrawals made from EPF after 5 years of continuous service are also tax-free.
  3. Low risk: EPF is a low-risk investment option, as the Government of India guarantees the interest earned on EPF contributions. This makes EPF a safe and reliable investment option for employees. Similarly, fixed deposits are considered low-risk investments as they offer guarantee returns.
  4. Compound interest: The interest earned on EPF contributions is compounded annually. It means that employees earn interest on their principal amount as well as on the interest earned in the previous years. This leads to higher returns and helps employees build a larger retirement corpus.
  5. Flexibility: EPF also offers flexibility to employees, as they can withdraw their EPF balance for specific purposes such as marriage, education, or medical emergencies. Partial withdrawals can also be made after 5 years of continuous service.
  6. Nomination: Employees can nominate a beneficiary for their EPF account. It helps to ensure that their savings are transferred to their loved ones in case of their untimely demise.

Overall, EPF is an important retirement Savings Scheme that offers several benefits to employees in India. It is a safe, reliable, and tax-efficient investment option that can provide financial security and help employees achieve their retirement goals.