The Provident Fund (PF) is a time-tested savings scheme that provides long-term financial security for salaried employees in India. Managed by the Employees’ Provident Fund Organisation (EPFO), PF ensures both employee and employer make monthly contributions that grow over time with interest. The accumulated corpus acts as a financial cushion after retirement or in emergencies.
But how does PF actually work? And how does it compare to other reliable options like Fixed Deposits (FDs)? Let’s break it down.
Why PF Contribution Matters
PF contributions are not just monthly deductions from your salary—they are an investment in your future. Here’s why they matter:
Employee Contribution to PF
As per EPF guidelines, employees contribute 12% of their basic salary to PF. However, this is relaxed to 10% for specific sectors and companies:
- Organisations with fewer than 20 employees
- Companies with annual losses exceeding their net worth
- Sick units as defined by BIFR
- Specific sectors like beedi, jute, brick, guar gum, and coir industries
These relaxed rates ensure even small or financially challenged businesses can extend PF benefits to their workforce.
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Employer Contribution to PF
Employers also contribute 12% of Rs. 15,000 (or actual salary if higher and voluntarily agreed) every month to an employee’s PF account. This equals a minimum contribution of Rs. 1,800. However, this amount is distributed across various components:
Breakdown of Employer Contribution
- EPF (3.67%): Directly deposited into the Provident Fund account
- EPS (8.33%): Allocated to the Employee Pension Scheme (up to Rs. 15,000 salary cap)
- EDLI (0.5%): Covers life insurance under the Employees’ Deposit Linked Insurance Scheme
Additionally, employers pay:
- 1.1% as administrative charges for EPF
- 0.01% as administrative charges for EDLI
The total employer outflow comes to 13.61% of the basic salary.
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Details required to determine the PF contribution rate
Basic Salary and Dearness Allowance (DA): EPS contributions are calculated on a maximum salary limit of Rs. 15,000.
Employee Contribution Rate: Typically set at 12%, but may be reduced to 10% in specific cases, such as small organisations.
Employer Contribution Rate: Also 12%, which is further split between EPF and EPS components.
Current EPF Balance: Important for calculating annual interest earned.
Age and Expected Retirement Age: Helps determine the duration for which interest will accrue on the EPF balance.
