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:
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
- For salaries exceeding ₹15,000: The employer’s mandatory contribution is capped at ₹1,800 per month. Employees earning more can opt for higher contributions voluntarily, but only if both the employee and employer agree to this 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 compulsory for companies with 20 or more employees. Even companies with less than 20 employees can opt for voluntary registration to extend PF to their employees. Once registered it is the employer’s responsibility to deduct and deposit the employee’s share and employer’s contribution to EPFO (Employees’ Provident Fund Organisation).
- Failure to register or comply with PF rules can result in penalties, interest on unpaid dues, and even legal consequences for the employer.
Filing and Payment Deadlines
Employers must pay PF Deduction from Salary contributions on time to avoid penalties. Contributions must be deposited by 15th of every month for the previous month’s wages. Delayed payments attract penalties which can range from 5% to 25% depending on the delay.
- 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.
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.
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.
Automating payroll to handle PF Deduction From Salary can reduce errors and keep companies compliant with the ever changing statutory requirements. For employees understanding these rules empowers them to make better financial decisions whether it’s voluntary contributions or timing withdrawals to maximize tax benefits.
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