Complete Guide on How to Calculate PF Deduction from Salary?

One of the most asked questions by HR teams and business leaders is, “How is Provident Fund (PF) calculated and what are the compliances?” The answer to How PF is Calculated? is simple yet important for any organization with salaried employees.

PF deduction from salary is mandatory for organizations with 20 or more employees. Both employee and employer contributes a percentage of employee’s basic salary and dearness allowance. This is for long term financial security of employees. Compliance to these government rules is very important to avoid penalties.

So what are the rules for PF deduction from salary? How to comply? Let’s see in this post. PF deduction from salary, contribution rules, tax benefits and withdrawal options.

How to Calculate PF Deduction from Salary?

When calculating PF (Provident Fund) deduction, you need to understand both employee and employer’s contribution break up. Here’s how you can do it step by step.

Employee’s Contribution

All Employee contribute 12% of their basic salary & dearness allowance. This Employee Deductions happen automatically from employee’s gross salary every month.

For example, if an employee’s basic salary is ₹15,000, their contribution would be:

• 12% of ₹15,000 = ₹1,800

Employer’s Contribution

The employer also contributes 12% of the employee’s basic salary and dearness allowance, but this amount is split into two portions:

• 8.33 % go to the Employee Pension Scheme (EPS).
• 3.67 % go to the Employee Provident Fund (EPF).

Let’s take the same example of ₹15,000 as the employee’s basic salary. The employer’s contribution would be:

• 8.33% of ₹15,000 = ₹1,250 to the EPS.
• 3.67% of ₹15,000 = ₹550 to the EPF.

Total Contribution per Month

Adding up both the employee’s and employer’s contribution, the total monthly contribution to the EPF and EPS is:

• • Employee’s contribution: ₹1,800 (EPF)

• Employer’s contribution: ₹1,250 (EPS) + ₹550 (EPF)

This brings the total to ₹3,600 per month for the employee.

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Special Cases

• If the salary is more than 15,000 rupees:The employer’s compulsory contribution is set at Rs1,800 per month. Employers who pay more may choose to contribute more voluntarily in exchange for a certain amount, however only if the employer and employee accept the arrangement.
• Administrative charges: Employers are required to pay an additional 0.50% administrative fee on the employee’s EPF wages​.

Compliance Requirements for Employers

PF Deduction from Salary rules are mandatory for companies. Using a good pf software can help you automate the process and reduce errors. Here are the points every employer should keep in mind.

 PF Registration for Companies

PF registration is mandatory for businesses with at least 20 employees. Even small-sized companies with fewer than 20 employees are able to choose to sign up for a voluntary registration in order to offer PF benefits for their workers. Once the employee is registered, it’s the responsibility of the employer to take from the account and pay back employee’s shares, as well as employers’ contribution into EPFO (Employees Provident Fund Organization).

• Failure to join or abide by PF rules could result in penalties and interest on dues that are not paid and even legal consequences for the employer.

Filing and Payment Deadlines

Employers are required to pay the PF deductions from salary contributions on time in order to avoid penalties. Contributions must be paid on the 15th day of each month for the month’s pay. Paying late penalties vary from 5% to percent, based on the length of delay. Penalties for non-compliance: Incomplete contributions of PF contributions will result in financial penalties that range from 5 percent of the unpaid amount for 2 months and up to 25 percentage for longer than 6 months.

• Penalties for non-compliance:  Late deposits of PF contributions result in financial penalties ranging from 5% of the unpaid amount for up to 2 months to 25% for more than 6 months.

Administrative Charges

In addition to the contributions to the employee’s EPF and EPS accounts, employers must pay administrative charges:

• 0.50% of the employee’s salary for EPF administrative costs, with a minimum charge of ₹500 per month.
• EDLI (Employee Deposit Linked Insurance) contributions of 0.50% must also be paid, providing insurance coverage to employees in case of death during employment​.

Record Keeping and Reporting

Employers must maintain accurate records of employees’ PF contributions and ensure they are updated regularly in the EPFO portal. Monthly returns and payments should be submitted through the EPFO’s Unified Portal. Employers are also required to generate a UAN (Universal Account Number) for each employee, which enables them to manage their PF account and access funds across different employers​.

Employee Opt-Out and Voluntary Contributions

Employees earning a basic salary above ₹15,000 per month have the option to opt-out of PF if they have never contributed to the scheme in the past. Employers need to ensure that they adhere to the rules regarding opt-outs and that necessary forms are filed on time.

In cases where both the employee and employer agree, employees can contribute a higher percentage voluntarily. However, this requires mutual consent, and employers are not obligated to match any excess contributions​ with payroll deductions in india guide.

Tax Benefits and PF Withdrawal Rules

The PF Deduction from Salary provides significant tax advantages for employees, and knowing the withdrawal rules is essential to avoid penalties and maintain compliance. Here’s how the tax benefits work and what to consider when withdrawing PF in salary.

Tax Benefits of PF Contributions

The Employee Provident Fund (EPF) operates under an EEE (Exempt-Exempt-Exempt) tax model, which means that contributions, interest earned, and the amount received upon withdrawal are all exempt from tax, provided certain conditions are met.

• Employee Contribution: Contributions to the EPF are eligible for tax deductions under Section 80C of the Income Tax Act.
• Employer Contribution: The employer’s contribution is also exempt from tax up to ₹7.5 lakh per year. However, if the total contribution by the employer exceeds this limit, the excess amount will be taxed as perquisites in the hands of the employee​.

Taxation on Withdrawals

While EPF enjoys tax benefits, withdrawals are subject to conditions:

• Tax-Free Withdrawals: If the employee has continuously contributed to the PF for five years or more, the amount withdrawn is entirely tax-free. Using payroll software can help businesses track contributions accurately and ensure compliance with withdrawal and tax rules.
• Premature Withdrawals: If the employee withdraws before five years of continuous service, the amount withdrawn is taxed, and TDS (Tax Deducted at Source) applies. The current TDS rate is 10%, provided the employee has a valid PAN.
• Partial Withdrawals: Employees can make partial withdrawals from their PF account for specific reasons such as medical emergencies, higher education, or marriage. However, these withdrawals are subject to certain limits and conditions. For instance, you can withdraw up to 50% of the employee’s contribution after five years for marriage or higher education​.

Rules for Full Withdrawal

• Retirement or Unemployment: Employees can withdraw the entire PF amount under two scenarios – upon retirement at age 58 or if they have been unemployed for more than two months. In the case of unemployment, up to 75% of the PF balance can be withdrawn after one month of unemployment, and the remaining can be withdrawn after two months​.
• Impact of Unclaimed Funds: If the PF account becomes inactive, i.e., no contributions for more than three years, the interest on the account is still earned but taxable.

Additional Benefits: EPS and EDLI

Along with the EPF, employees also benefit from the Employee Pension Scheme (EPS) and Employee Deposit Linked Insurance (EDLI). While EPS provides pension benefits post-retirement, EDLI ensures insurance benefits to the employee’s family in case of death during service. Employers are required to contribute to both schemes, with 8.33% of the salary going to EPS and 0.50% for EDLI​.

Conclusion

Understanding and complying with Provident Fund (PF) rules is crucial for both employers and employees. HR professionals, CEOs, and CXOs need to ensure that proper contributions are made on time, and employees are aware of the tax advantages and withdrawal conditions.

It’s not just about compliance for businesses; it’s about keeping employee trust by managing their contributions well and having their long term financial security in place. Meanwhile employees get tax deductions, a pension plan and options for early withdrawal in case of emergencies. Using Superworks can simplify employee benefits. Meanwhile employees get tax deductions, a pension plan and options for early withdrawal in case of emergencies.