Provident Fund

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Provident Fund

Provident fund is a welfare scheme for the benefit of the employees. Under this scheme, a certain sum is detected by the employer from the employee’s salary as his contribution to the Provident Fund every month. The employer also contributes a certain percentage of the salary of the employee to the provident fund. The interest earned on these investments is also credited to the provident fund account of the employees. At the time of retirement, the accumulated amount is given to the employee, if certain conditions are satisfied.

Types of Provident Funds

Statutory Provident Fund (SPF)
Public Provident Fund (PPF)
Recognised Provident Fund (RPF)
Unrecognised Provident Fund (URPF)

Statutory Provident Fund (SPF)

Statutory Provident Fund is set up under the Provident Fund Act, 1925. They are also known as Government Provident Funds. So employees who work for these institutions would be qualified to give to them.

Public Provident Fund (PPF)

Public Provident Fund is a scheme, which is covered under Public Provident Fund Act, 1968. Any member of the public, whether in employment or not, may contribute to this fund. Therefore, even self-employed persons may contribute to this fund. The minimum contribution to this Fund is Rs.500 and maximum Rs.1,50,000 per year. The contributions made to the scheme along with the interests are repayable after 15 years unless extended. The rate of interest, at present, under the scheme is 8% per annum.

Recognised Provident Fund (RPF)

Recognised Provident Fund scheme is a scheme to which the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952 applies. According to this Act, any person who employs 20 or more employees, is under an obligation to register himself under the PF Act, 1952 and start a provident fund scheme for the employees in his organization. However, there is no restriction if the employer and the employees of such establishment wish to start a scheme even if the number of employees is less than 20. The establishment has a choice between the following two alternatives,

They may join the government scheme set up by the Provident Fund Commissioner under the Provident Fund Act, 1952.
They may start a PF scheme in their own organization and get the approval of the Provident Fund Commissioner.

The Government scheme is already recognized by the Commissioner of Income Tax but for the second scheme started by the employer and the employees themselves, they have to create a trust for running such scheme and besides taking the approval from the Commissioner of Income-Tax. In these case, the funds of the trust and required to be invested in a particular manner and the income of the Trust is to be claimed as exempt from income-tax. If the CIT grants the approval, it is called a recognized provident fund scheme.

Unrecognised Provident Fund (URPF)

A scheme started by the employer and the employees in an establishment, whether approved by the commissioner of Income Tax is called an unrecognized provident fund.

Know more about Types of Provident Fund.

PF Contribution Rate

PF contribution paid by the employer and employee is 12% of (basic salary + dearness allowance + retaining allowance). Equal contribution is payable by the employee and employer. In case of establishments which employs less than 20 employees or meet certain other conditions, as per the EPFO rules, the contribution rate for both employee and the employer is restricted to 10%. For most employees working in the private sector, it’s the basic salary on which the contribution is calculated.

It is necessary that employees’ drawing less than Rs 15,000 per month, to become members of the EPF. As per the guidelines in EPF, employee, whose ‘basic pay’ is more than Rs. 15,000 per month, at the time of joining, is not required to make PF contributions. However, an employee who is drawing a pay of more than Rs 15,000 can still become a member and make PF contributions, with the consent of the Employer and Assistant PF Commissioner.

To obtain ESI or PF registration, visit IndiaFilings.