Is employee provident fund contribution compulsory for an employee?

By Staff

Updated: Tuesday, May 12, 2020, 12:48 [IST]

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.

Is employee provident fund contribution compulsory for an employee?

However, once employee A starts to contribute towards provident fund he cannot opt out of it. So, the decision whether to deduct or go for non-deduction of provident fund should be made at the start of employee A's career i.e. on day one of joining a job. This will increase the in-hand salary of employee A.

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.

EPF eligibility criteria

If you are an employee with a basic + expensive allowance of less than 15,000 rupees per month, it is compulsory for you to open an EPF account by your employer. Organizations with 20 or more employees are required by law to register for the EPF program, while organizations with less than 20 employees can also register voluntarily. If you receive a salary above Rs. 15,000 per month, you are considered as an ineligible employee and it is not compulsory for you to become a member of the EPF, although you can still register with the consent of your employer and the approval of the PF Assistant Commissioner.

Percentage of EPF contribution

The employer's contribution is calculated as 12% of the total of the following elements - (basic salary + cost allowance + maintenance allowance). An equal contribution is also paid by the employee. If your organization employs less than 20 employees (as well as certain other prerequisites according to EPFO rules), the contribution rate for both the employee and the employer is limited to 10%.

Out of an employer contribution of 12% or 10% (as it stands), 8.33% is paid into the Employees Retirement Plan. However, it is calculated on Rs 15,000. Thus, for each employee receiving a base salary equal to or greater than Rs 15,000 rupees, Rs 1,250 rupees each month are diverted to EPS. However, if the basic salary is less than Rs 15,000 rupees, 8.33% of this total amount is transferred to the EPS. The balance outside of this 8.33% is kept under the EPS scheme. Upon retirement, the employee receives all of his share plus the share retained to his credit in the balance of the EPF account by the employer.

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.

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