According to data collected in the 2011 census, there are approximately 104 million individuals above the age of 60 years residing in India. Among them, the majority do not have any sustainable source of regular income and depend on their savings to cover the daily expenses. To facilitate them, the government, over the years, has introduced several schemes that allow individuals to gather a substantial savings corpus post-retirement. One of the most popular among them is the Provident Fund.
What is PF?
Provident Fund is a government-backed savings scheme that allows individuals to gather a sizeable corpus over years. It requires individuals to contribute a percentage of their income each month to create a pension fund. Over the years, the contributory amount gets accrued and can be accessed after the individual’s retirement. In the face of Indian market volatilities you should invest in Provident Funds, fixed deposits and such other schemes.
To know what is PF, you should first learn about the three principal types of Provident Funds in India. These are –
- General Provident Fund
This is an account that is available only for government employees. To partake in this scheme, government employees are required to contribute a portion of their salary each month to the GPF account. The interest on GPF is provided in accordance with government notifications, which are revised from time to time. Currently, the interest on GPF is pegged at 7.9% per annum.
- Employee Provident Fund
This type of Provident Fund is applicable for all privately owned organisations with more than 20 employees. Here, employees are required to contribute a portion of their salary to the fund, whereas the employer contributes a similar amount, on which the government provides an interest. The accumulated corpus in this fund can be accessed post-retirement, during unemployment or under certain special circumstances.
- Public Provident Fund
PPF investment is a scheme where an individual voluntarily invests a portion of their income on which the government offers an interest. PPF mandates a minimum and maximum investment of Rs. 500 and Rs. 1.5 Lakh, respectively. It also has a fixed maturity period of 15 years after which investors can withdraw from the account.
Provident Funds are among the most popular schemes that individuals invest in to plan their post-retirement life.
Alternatively, many choose to forego these schemes, owing to their tenor restrictions, in favour of fixed deposit accounts.
How is interest on Provident Fund calculated?
To understand how to calculate PF interest, you should first understand the basics of how the computation is done.
The interest on Provident Funds is calculated at the end of each month, but the deposit is made cumulatively at the end of each year.
Let us now look at how the interest is calculated with the help of an example.
An individual’s salary consists of two components – Basic salary and dearness allowance.
Let us assume, Basic salary + dearness allowance = Rs. 20,000
The employee’s contribution towards EFP = 12% of Rs. 20,000 = Rs. 2,400
Employer’s contribution towards Employees’ Pension Scheme = 8.33% of Rs. 20,000 = Rs. 1,666.
Employer’s contribution towards EPF = Employee contribution – Employer’s contribution towards Employee Pension Scheme= Rs. 734.
Therefore, total EPFO contribution each month = Rs. (2400+734) = Rs. 3,134.
Interest on EPFO is calculated monthly = 8.65/12 = 0.72%
Therefore, interest on EPFO = Rs. (6268x 0.72%) = Rs. 45.12.
Thus, an amount of Rs. 45.12 is calculated as interest on an individual’s account every month.
Alternatively, individuals can also make use of an online PF calculator to know their interest amount more easily.
What are the benefits that one can enjoy through PF?
Now that you know what is PF, take a look at the benefits that a salaried individual that enjoy with them.
- Tax benefits
An employee’s contribution is eligible for tax exemption under Section 80C of the Income Tax Act. Further, the interest earned from the account is also exempted from taxation. Withdrawals from EPF are also not taxable if an individual continues his/her service for five consecutive years.
Out of the 12% contribution that employees make towards EPF, 8.33% goes towards the Employees’ Pension Scheme. According to rules put forth by EPS, 10 continuous years of contribution towards EPS ensure lifelong pension for individuals.
- Pre-mature withdrawal
EPFO allows pre-mature withdrawal of funds from the account under special circumstances, after 5-10 years of service by an individual. But the body advises strongly against it to help individuals maximise their benefits from it.
That is why, alternatively, you can choose to park your savings in a Fixed Deposit account, offered by financial institutions like Bajaj Finance.
This account offers similar benefits to PF, without stringent withdrawal restrictions. You can choose a short-term or long-term FD, according to your convenience.
Author Bio:Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at HighlightStory
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