Contribution towards Employee Provident Fund is optional if the basic salary is more than Rs.6500/- per month and the employee can choose between deduction and non-deduction of provident fund. If we consider employee A with a basic salary of Rs7000/- then the employee can decide at the start of his career whether or not to become a member of provident fund.
On the other hand, contribution to provident fund is mandatory if the basic salary of an employee is less than Rs 6500.
We can consider another employee B with a basic salary of Rs 4500, who has to compulsorily contribute towards PF as his salary is less than Rs.6500.
Now, if after some years employee B's basic salary increases from Rs.4500/- to Rs.6501/- then also he has to remain a member of provident fund. He will not have the option of discontinuing as he has already started contributing towards provident fund.
Percentage of Contribution of Employer and Employee
Both the employee and the employer contribute 12% of the basic salary of the employee towards provident fund. An employee can contribute higher above the statutory rate. However, its not mandatory for the employer to match the voluntary contribution which is over and above the statutory rate.
Break up of the contribution
Entire 12% of basic salary of the employer's contribution is deposited in the provident fund account. Out of 12% contribution of the employees, 3.67% is contributed to provident fund and the remaining 8.33% is deposited in provident scheme.
Benefits of Provident Fund
the advantages of contributing towards provident fund include:
- Tax benefit
- Retirement benefit
- Withdrawal Benefit
Provident fund is considered one of the easiest way of building retirement corpus as it earns a handsome interest of 8.75% for 2013-14. However, amounts should not be withdrawn before completion of 5 years. If you withdraws before 5 years then the withdrawal amount will be added to your income and the entire amount will be taxable.
Why you should opt for increased PF contribution?
Remember, when you make a PF contribution you are building money for your retirement. It is better to loook at an increased amount of PPF contribution because you also get tax benefits under Sec 80C of the Income Tax Act
Recently, the government also placed some restrictions in the withdrawal of PF contributions. However, due to some backlash it has now been withdrawn.
Tax benefit one reason to contribute to PF
Apart from building a retirement corpus, you also get tax benefit under Sec 80C of the Income Tax Act, which is one reason for contribution to the PF.
This tax benefit is available upto a sum of Rs 1.5 lakhs per year. Apart from this one must also remember that the interest receieved from the PF is also tax free.
This is another positive for contribution to the Provident Fund.
Do not withdraw from PF when changing jobs
You can actually withdraw your PF, if you are without a job for 2-months. However, this practice is not advisable. You should wait and see if you get a job and then transfer your PF to the new employer. This will help build money for your retirment.
Also, though you can borrow from your EPF, you should avoid doing so, as far as is possible. All in all, while contribution to the PF is compulsory, there are some restrictions on its withdrawal, which is a good practise.
Taxation on PF
It is also important to know the tax implications on PF. It must be noted that PF after 5 years is not taxable. However, if you have not completed 5 years of service and have withdrawn the money the amount would be fullly taxable. Hence, it is better to note the PF tax implications. In any case what is most important note that once you have begun making a PF conttriution it is better to continue. It helps to build a corpus for retirement which is a good thing in itself. At least that way you are assured of some money after retirement.