What is Provident Fund (PF): Meaning, Benefits, Types

  BY: Pankaj Bansal , Founder at NewsPatrolling.com

What is Provident Fund (PF)?

Provident Fund (PF) is a type of retirement savings scheme, typically mandatory for employees in both public and private sectors. It allows employees and employers to contribute a fixed percentage of the employee’s salary into a dedicated account, with the aim of building a retirement corpus. Upon retirement or under specific conditions, the accumulated funds, along with interest, are disbursed to the employee.

Benefits of Provident Fund

1. Retirement Savings: It creates a long-term savings plan to support individuals after retirement.
2. Tax Benefits: Contributions made towards provident funds are often eligible for tax deductions under various government schemes.
3. Interest Accumulation: The deposited amount earns interest, which is typically higher than that offered by traditional savings accounts.
4. Employer Contribution: Employers also contribute a matching portion, further boosting the savings.
5. Financial Security: It acts as a financial safety net during retirement, job transitions, or emergencies like illness or disability.
6. Partial Withdrawals: Employees can make partial withdrawals under certain conditions, such as for medical emergencies, education, or purchasing a home.

Types of Provident Funds

1. Employee Provident Fund (EPF):
• Managed by the Employee Provident Fund Organisation (EPFO) in India, the EPF is a retirement benefits scheme mandatory for salaried employees working in companies with 20 or more employees.
• Contributions: Both employee and employer contribute 12% of the employee's basic salary and dearness allowance (DA) to the fund.
• Withdrawals: Employees can withdraw the amount after retirement or when they meet certain conditions (e.g., unemployment or medical emergencies).
2. Public Provident Fund (PPF):
• Open to all individuals, including salaried and self-employed, this long-term investment scheme is backed by the Government of India.
• Tenure: 15 years, with the option to extend in blocks of 5 years.
• Contribution Limits: A minimum of ₹500 and a maximum of ₹1.5 lakh per financial year.
• Tax Benefits: Contributions are eligible for tax deductions under Section 80C, and the interest earned is tax-free.
3. General Provident Fund (GPF):
• GPF is available exclusively to government employees.
• Eligibility: Central and state government employees.
• Contributions: Government employees can contribute a portion of their salary to their GPF account.
• Withdrawals: The employee can withdraw the accumulated funds at the time of retirement or under specified conditions.
4. Voluntary Provident Fund (VPF):
• An extension of the EPF scheme, employees can voluntarily contribute more than the mandatory 12% of their salary to the EPF.
• Interest: It earns the same interest rate as the EPF.
• Flexibility: The contribution is voluntary, and there is no compulsion from the employer to match the voluntary contributions.

Conclusion

Provident Fund is an essential financial tool for employees, helping them secure their future with systematic savings. The different types cater to various segments of the population, offering flexibility, tax benefits, and financial stability post-retirement.