Every Indian employee receives the salary after the company they’re working in deducts a specific amount of money as Provident Fund. One might feel that they are not receiving the entire salary. However, when an individual wants to retire from their job, the Employee Provident Fund (EPF) becomes one of their primary sources of income for a comfortable living. All in all, it’s a long-term retirement saving scheme regulated by the Ministry of Labour and managed by the Employees provident fund organization (EPFO).
The provident fund scheme aims to create an adequate retirement corpus for salaried employees by inculcating the habit of saving money. The fund comprises monetary contributions from both employee and employer. Both of them need to contribute 12% of the employee’s basic salary towards this fund on a monthly basis. Once an individual retires, they receive the lump sum of the entire contribution made by employer and employee with interest on both.
How a Provident Fund Works
Generally, people like to save money in savings accounts offered by various government and private sector banks. However, it’s rarely enough to support families with a comfortable life after retirement.
The retirement challenges have been further deepened because of social change, the migration of citizens from rural areas to developed cities, and rapidly changing family structures. In traditional societies, the younger generation serves the needs and requirements of senior citizens. However, widely dispersed families, declining birth rates and longer life expectancies have made it difficult to sustain this traditional lifestyle.
For the aforementioned reasons and more, various governments have stepped in to provide long-term financial support to retirees. In this regard, provident funds provide a sustainable way for the working population to save a fraction of their salary every month and maintain a good lifestyle after retirement. Now that you know what is provident fund and how it works, it’s time to check objectives of the same.
What are the objectives of the provident fund?
- Provident fund scheme is used to help the government, public or private sector employees by providing them with a lump sum amount on their retirement to live a healthy lifestyle.
- It also helps in providing social and financial security to the members of the scheme.
Types of PF schemes
Employees’ Provident Fund Scheme, 1952: The government of India set up this scheme to provide post-retirement benefits for the employees or their legal heirs in case of death or other undesirable events.
Employees’ Pension Scheme, 1995: The Employees’ Pension Scheme was framed to provide the retiring pension, superannuation pension, or permanent total disablement pension to all employees covered under the Act.
Employees’ Deposit-linked Insurance Scheme, 1976: The EDLI scheme was framed to provide insurance benefits to the employees family in case of death while in service.
Employee Provident Fund Interest Rate
The current interest rate for the provident fund for the financial year 2020-2021 is 8.50% p.a. According to the rules, the PF interest rate is calculated every month and then transferred to the Employee Provident Fund accounts every year on 31st March. Also, the interest earned on the provident fund is exempted from tax.
The Government of India decides the interest rate with the help of the Central Board of Trustees(CBT), which regulates the Act. The interest rate set by the GOI stays valid for that current financial year, i.e. starting from 1st April of one year to 31st march year ending of next year.
Sources of money invested in the provident fund:
- Employee’s Contribution: A specific amount that’s deducted from the employee’s salary every month and goes to the provident fund.
- Employer’s Contribution: The company will contribute an amount each month, besides the usual salary transferred to the employee’s account.
Benefits of a Provident Fund
- Investment management
- It helps strengthen the company’s image as a dependable company that values the welfare of the staff.
- Increase employees’ confidence in the company, thereby enhancing their performance and dedication.
- Helps create a strong relationship between the business and employees, minimizing any potential dispute.
- Minimizes job-hopping and increases staff loyalty for a long relationship with the company.
- Financial security
- Encourages the habit of long-term savings.
- Provides financial security for the employee’s family after retirement, resignation, or death.
- Return on investment
- Savings made through the provident fund is a regular process. Employees can run the same account in the event of resigning and switching to work for another company. The savings can be kept with the original account or transferred into another provident fund.
- After retirement, the employee can maintain the balance in the fund or withdraw the sum as annuities, to continue generating returns on the investment.
PF withdrawal rules:
The amount accumulated in the PF account can be withdrawn either partially or entirely, depending upon specific terms and conditions. To withdraw the entire amount, an individual needs to be either retired or unemployed for a period of more than two months. Only because of the reasons mentioned above, the amount can be withdrawn completely pending an attestation from a gazetted office.
According to the PF rules, individuals can also withdraw provident fund balance in the event of children’s marriage, their higher education, for home loans payment, emergency medical needs, home renovations, purchase of land, purchase or construction of a house, and at a certain age before retirement.
Provident Fund (PF) partial withdrawal rules:
Unemployment: According to the latest PF rules, an individual can withdraw up to 75% of the entire PF balance on being unemployed for one month after quitting their last job. The remaining 25% of the PF balance can be withdrawn if the person remains jobless for more than two months.
Retirement: After reaching the age of 54 and within a year of retirement/superannuation (whichever is earlier), an individual is eligible to withdraw up to 90% of the provident fund balance.
Marriage/education of children: In the event of marriages or post matriculation education of children, employees can withdraw up to 50% of the employee share.
Handicapped: For handicapped people, the PF body allows withdrawal from the provident fund balance for buying equipment to minimize their hardship. Due to this, a handicapped person can withdraw six months’ basic wages and dearness allowance (DA) to meet their needs.