Step-by-Step Guide: How PF is Calculated in Your Payroll System
pf percentage
12 min read
August 23, 2024
Among the most critical components with regard to payroll management is the Provident Fund. Every employee, employer, or even HR manager has to know what EPF means, how PF is calculated, how PF contribution is calculated, how interest on PF is calculated in India, how pension is calculated in PF, and many more things.
The difference is only in ensuring that one fully understands how the payroll system calculates PF to remain compliant with regulations and to save the financial futures of employees from a lot of danger.
This the blog will help you to know about PF calculation, how to calculate PF from basic salary, its components, and many more things.
EPF is the Employee Provident Fund, which is a retirement or resigning scheme. This is one of the important schemes designed to help the employee save some of his or her salary for retirement. In the scheme, both the employee and employer make their contributions towards this fund on a monthly basis.
EPF is an additional key element of HR compliance in India to ensure you have a safe amount with you after retirement.
The EPF scheme is governed under the Employees’ Provident Funds as well as the Miscellaneous Provisions Act, of 1952. The body administering EPF is the Employees’ Provident Fund Organisation. Periodically, with changes updated every year, the money collected in an employee’s EPF account also earns interest, and it is changed periodically by the EPFO.
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To understand how PF and ESI is calculated, it’s important to break down the components that make up the Provident Fund. As per the PF calculation rules, the primary components include:
Basic Salary: How is PF interest calculated? It is counted based on the employee’s basic salary and dearness allowance (if applicable).
Employee Contribution: The PF percentage is 12% of the basic salary of the employee payable.
Employer Contribution: An employer also pays 12% of the basic salary of an employee for their PF; and this amount is split between the EPF and EPS.
These elements are important and they can be easily attained with HRMS and payroll software.
What Is The Eligibility for EPF?
The eligibility criteria for PF participation are clearly defined:
Salaried Employees: All those employees who have a minimum basic salary for PF – ₹15,000 per month can become members.
Employee’s Consent: If an employee draws more than ₹15,000 per month, then he has the option to even want to or not want to join the EPF scheme.
Mandatory Enrollment Of Employee: Every PF establishment that employs 20 or more persons is required to obtain registration with the EPFO and make contributions towards EPF.
Division Of EPF Contribution To EPF
Both the employee and the employer contribute to the EPF, but how these contributions are divided as per the provident fund formula.
Employee’s PF Contribution:
Rate of Contribution: The employee pays 12% of the basic salary towards EPF.
Contribution to EPF: This entire 12% of an employee’s basic salary goes directly to the EPF account of the employee.
Employer’s PF Contribution:
Total Contribution: Employers’ contribution to the EPF is 12% of the basic salary of an employee.
Division: Out of this 12% provided by an employer, 8.33% is spent for EPS; only the remaining 3.67% gets credited to the EPF account of an employee.
Understanding this division is very important in order to know how PF is calculated on salary in India.
What Are The Benefits Of Contribution To The EPF?
EPF is a retirement scheme that ensures employees get a comfortable financial life after retirement. The Employees Provident Fund Scheme is the system that provides finances to employees during retirement also coupled with a monthly pension.
The scheme is availed by employees in the government as well as the private sector. After knowing how is ESI and PF calculated, let us discuss the key benefits that employees get from opening an EPF account. The advantages can be broadly divided into 4 major areas:
1. Provident Fund Benefits
Easy Withdrawal Process: With the new-age innovations, it has become quick and easy to withdraw your PF from your EPF account. You can successfully withdraw the PF amount by using UAN from the online account.
PF Transfer Facility: You can effortlessly transfer the old PF balance into the new job.
PF Advance Benefits: The EPF account allows for an advance in cases of financial emergency, such as in marriage or while purchasing a house. Therefore, it provides financial support to the subscriber at the time of need.
Best Saving Option: For salaried people, contribution to EPF is an optimum saving scheme since it has no risk and the guarantee of the Indian Government.
Interest Earnings: Interest gets credited into your EPF balance at the end of each year by the EPFO, based on your basic salary and dearness allowance.
PF for Family: The PF balance of the PF subscriber gets transferred to the family in case of his/her death.
2. Pension Benefits
Retirement Benefits: After the 10 years of PF, a person is entitled to a monthly pension after retirement. This will sustain you with a steady income in your post-retirement years.
Withdrawal of Pension Amount: You can withdraw the PF salary – pension amount in case of less than 10 years of service instead of availing of a monthly pension.
Guaranteed Pension: The eligible PF members are entitled to a minimum guaranteed pension of ₹1,000 per month regardless of the contribution to the epf.
Pension for Family: In case of the death of the PF member, the first family is entitled to draw the pension for continuous financial support.
Disablement Pension: The member shall be entitled to a disablement pension from the EPFO in the event of permanent disability, which assures the PF member financial support against any mishappening.
3. EDLI Pension Benefits
Free Insurance: You are eligible for the Employee Deposit Linked Insurance(EDLI) scheme whenever you open a PF account. After demise, It provides free insurance with a maximum benefit of ₹7 lakhs to your family.
4. Tax Benefits
Tax-Free Interest: The interest earned in the EPF is also tax-free from the EPF balance, presuming you have served it for 5 continuance years. This exemption adds another chip to the pile of attractions to invest in EPF as a long-term saving tool.
Tax Deduction Under Section 80C: The PF contributions are allowed as a deduction under Section 80C of the Income Tax Act of 1961. Deduction is allowed to an extent of ₹1.5 lakh in a financial year.
Exemption on Final Withdrawal: The lump sum received on final withdrawal of the balance in EPF, including that of the employer and employee contributions, and the interest accrued to it, is absolutely free of tax if a few conditions are met.
The EPF scheme not only guarantees financial security after retirement but also provides a gamut of additional benefits.
How Is PF Calculated In India?
Some are governmentally mandated in India; here are a few rules about the amount one needs to contribute to an EPF account.
Basic Salary: What is an employee’s basic salary? That is the basic component of PF calculation.
Dearness Allowance (DA): Dearness allowance, if given, shall be added to the basic salary and forms an integral part used in calculating PF.
Years Of Service: The years an employee has put in the company since the opening of the EPF account to determine the maximum possible amount that would have been added to the EPF account.
Current EPF Balance: Whether there is any carry forward balance of EPF from previous contributions, if any, add that amount to the total balance.
The EPF Interest Rate: The rate of interest declared by EPFO for the financial year on the EPF balance for that year alone.
PF calculation Formula:
Total PF Contribution= [(Basic Salary+Dearness Allowance)×12%]+[(Basic Salary+Dearness Allowance)×3.67%]
Let us take an example to understand how PF is calculated from the basic salary:
Basic Salary: ₹18,000
Employee Contribution: ₹2,160( 12% of ₹18,000)
Employer Contribution: ₹661 (3.67% of ₹18,000)
Employer Contribution towards EPS: ₹1,499 (8.33% of ₹18,000)
The total contribution for the employee’s EPF account is ₹2,821: ₹2,160 + ₹661.
Considering interest is 8.25 percent per annum, then earned interest in month is:
Monthly Interest Rate: 8.25%/12 = 0.6875%
EPF Contribution for April: ₹2,821 (no interest is paid in the first month)
Total Amount in EPF Account by May: ₹5,642 (₹2,821 + ₹2,821)
Interest Earned in May: ₹5,642 * 0.6875% = ₹38.75
This process continues month by month, with the PF contributions and accrued interest added to the EPF balance until the employee reaches the retirement age of 60.
While this is how PF and the interest rate are calculated manually, it’s much easier to calculate your Provident Fund online using the Superworks EPF calculator.
By understanding this calculation process, you can have a clearer picture of how much you are contributing towards your retirement, and you can check by using the PF calculator.
How Is Interest Calculated On PF?
Interest on EPF contributions is credited to the subscriber’s account at the end of each year, on the balance in the account. The rate of interest is fixed by the EPFO and may vary from year to year. The interest shall be compounded yearly and shall be credited to the employee’s EPF account at the close of the financial year.
So, once again, it is not about the interest but how the PF interest is calculated in India(ow PF is calculated), which allows employees to estimate the growth of their savings over time.
Here’s a step-by-step breakdown of how PF is calculated with the Superworks payroll management system:
Basic Salary Input: The system takes the employee’s basic salary as the input for PF calculation.
Interest Calculation: The system calculates the interest that will be earned by applying the annual interest rate on the total EPF balance.
Compliance Check: This payroll system will ensure that all PF contributions are in full conformity with rules and regulations as guided by EPFO, and the process is aligned to the statutory compliance in India.
No matter what the challenges of the EPF calculation, or how is pf contribution calculated, etc- Superworks is the best tool you can adopt for your easy payroll and compliance management.
PF is calculated as 12% of the basic salary plus dearness allowance (if any). Both the employee and the employer contribute this percentage to the PF.
How Can I Calculate My PF Balance?
You can know your PF balance by logging into the EPFO portal with your UAN and checking your passbook. This shall contain your contribution, employer's contribution, and interest earned.
What Is The PF Deduction For ₹25,000 Salary?
For a salary of ₹25,000, the PF deduction would be ₹3,000 (12% of ₹25,000). The employer's contribution will also be ₹3,000, divided between EPF and EPS.
How To Calculate PF Above ₹15,000?
For salaries above ₹15,000, employers are only required to contribute to EPF on ₹15,000 unless there is an agreement to contribute to the actual salary. The PF contribution of ₹15,000 would be ₹1,800.
How PF Is Calculated In CTC?
PF typically constitutes 12% of the basic salary, which is a part of the Cost to Company (CTC). The employer's contribution is also included in the CTC, making the total PF-related component 24% of the basic salary.
Written By :
Alpesh Vaghasiya
The founder & CEO of Superworks, I'm on a mission to help small and medium-sized companies to grow to the next level of accomplishments.With a distinctive knowledge of authentic strategies and team-leading skills, my mission has always been to grow businesses digitally The core mission of Superworks is Connecting people, Optimizing the process, Enhancing performance.
Superworks is providing the best insights, resources, and knowledge regarding HRMS, Payroll, and other relevant topics. You can get the
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