Provident Fund in India – An Overview

Bala Guru Dheeraj

As provident fund in India plays a major role in contributing the savings of the employee, it is the responsibility of all the citizens to understand the basic knowledge of provisions of the act. This article tries to explain the applicability, contribution rates, various methods for calculation of contribution, types of provident fund, taxability of contribution to various funds and so on.

Applicability of the Act:

(a) to every establishment which is a factory engaged in any industry specified in Schedule I and in which 20 or more persons are employed and

(b) to any other establishment employing twenty or more persons or class of such establishments which the Central Government may notify.

An establishment to which this Act applies shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time falls below twenty. (Once applicable always applicable)

Wage limit for Contribution of Provident Fund:

Employees drawing basic salary up to Rs.15,000 have to compulsory contribute to the provident fund and employees drawing above Rs.15,000 have an option to become member of the provident fund.

Frequently Asked Question:

Employee who while joining the organization has a basic salary above Rs 15,001 have an option to either become or avoid becoming member of Provident fund, but employees whose basic salary while joining the organization is less then Rs 15,001 but after some period of time their basic increases above Rs 15,001 have to compulsorily continue to be member of provident Fund (doesn’t have an option to terminate the membership form of the provident fund)

Contribution to the provident fund:

Section 6: The contribution which shall be paid by the employer to the Fund shall be 12% (Basic wages + dearness allowance + retaining allowance)

Components for calculation of contribution:

Provident Fund contribution is required to be made @ 12% on the ‘Monthly Pay’ which is understood as:

– Basic wages (as defined in Sec 2(b) of the PF Act),

– Dearness Allowance

– Cash Value of Food Concession

– Retaining allowance.

Section 2(b) of the Act “Basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-

(i) the cash value of any food concession;

(ii) any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

(iii) any presents made by the employer.

From the above definition it is clear that all the emoluments which are earned by an employee other than those specifically excluded components given under clause i, ii & iii of Sec 2(b) of the Act, would be the basic wages for the purposes of contribution under the Act

Interpretation of ‘Any other allowance’ appearing in cluse (ii) above

The Hon’ble Supreme Court in Jay Engineering Works Ltd v Union of India, ruled that the expression ‘any other similar allowance’ should be of the same type as the allowances mentioned in the clause such as ‘dearness allowance’, ‘house rent allowance’, ‘overtime allowance’, ‘bonus’ and ‘commission’ as specifically excluded under Section 2(b) of the Act.

Based on court Rulings:

Whether to constitute particular allowance as a basic wages or not, it was held that in March 2011, by the Honorable High Court of Madhya Pradesh that

Allowances which are universally, necessarily and ordinarily paid to all employees across the board need to be considered while determining the PF liability.

Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages.

By way of example, it was held that overtime allowance, though is generally in force in all concerns, it is not earned by all employees of a concern.

It is also earned according to the terms of employment contract but because it may not be earned by all employees of a concern, it is excluded from basic wages.

It was also held that conversely, any payment by way of special incentive or work is not basic wages.

Rates of Contribution:

Calculation of Employees Provident Fund Contributions:

There are different types of computation for contributing to the provident fund. An employer and employee can opt to choose any of the methods prescribed.

Type 1:

If Basic Salary is less than Rs.15,000.  

Suppose Basic is Rs.14,000

Type 2:

If Basic Salary is above Rs. 15,000 i.e ceiling limit

Even though the basic salary limit exceeds the maximum limit of Rs.15,000. The Employer and Employee can contribute independently to the provident fund. In such case, the Company can calculate different methods of contribution depending

upon their Company’s CTC or policy or practice.

Contribution to EPF is calculated in a different ways, but in all cases EPS is calculated only up to 15,000 (Basic Salary limit) that means the maximum amount of Contribution to EPS is fixed to Rs 1,249 (Rs.15,000*8.33%).

Suppose Basic is Rs.20,000

Method 1: As per para 29(2) of EPF Scheme,1 952 the amount of contribution payable by the employee shall be equal to the amount of contribution payable by the employer in respect of such employee

It means amount of contribution payable by the employee shall be equal to amount of contribution payable by the employer

Method 2: As per pro visio to para 26A(2) of EPF Scheme, 1952 where the monthly pay of employee exceeds Rs.1 5,000 the contribution payable by him and in respect of him by the employer shall be limited to amounts payable on monthly pay of Rs.15,000.

It means when Basic salary of employee exceeds the maximum limit i.e Rs.15,000, an employer can restrict its share of contribution to Rs.15,000.

Method 3: In this method the both employer and employee can restrict the share of contribution to Rs.15,000.

PF calculation on arrears:

As per Circular no.C-III/4(85)11/HQ dt.16 may, 2011, Addl central PF commisioner and regional PF commisioner says

In case where wages agreement are made enhancing wages from back dates and the arrears are paid to them on a particular date, PF on arrears payment should be deducted and paid when the arrear payment is done.

Types of Provident Fund:

There are different types of provident fund which has been set up by the different persons for different purposes, which has been categorized below:

1) Statutory provident fund.

2) Recognized provident fund.

3) Unrecognized provident fund.

4) Public provident fund

i) Statutory provident fund: It is the specific provident fund which is only
meant for Government or Semi-Government employees, university or educational Institutions affiliated to a university established under the statute or other specified Institution.

This scheme is set up under the Provident Fund Act, 1925.

ii) Recognized provident fund: Any person who as employed 20 or more employees in an organization, is under an obligation to register himself under the Provident Fund Act, 1952.

In such a case, the employer has a choice to join the Government’s scheme or can start his own provident fund scheme after getting approval from Provident Fund commissioner and from commissioner of Income Tax.

iii) Unrecognized provident fund: It is a scheme where you don’t have an approval from the provident fund commissioner or from the commissioner of Income Tax.

iv) Public provident fund: It’s covered under the Public Provident Fund Act, Any public whether in employment or not, may contribute to public provident fund account.

Employees have an option to contribute to Public Provident Fund in addition to any of the funds specified above.

Minimum Contribution to the fund is Rs.500 and Maximum is Rs.1,50,000 per year.

The accumulated sum is payable after 15 years (it may be extended). The rate of interest carries to the fund is 8. 1%.

Taxability of various provident fund:

Notes:

1) Taxability of accumulated balance of recognized provident fund:

If the following conditions are satisfied accumulated balance received is not taxable:

(i) The employee has rendered continue service with his employer for a period of 5 years or more.

(ii) If the employer has been terminated because of the certain reason which are beyond his control

(iii) If the employer has resigned before completion of 5 years but he
joins another employer who maintains recognized provident fund and provident fund money has been transferred from current employer to the new employer.

If withdrawal is taxable, Section 192A is attracted and provision is as follows:

The trustees of the EPF Scheme 1952 framed under section 5 of the EPF & Misc. Provisions Act, 1952 or any person authorized under the scheme to make payment of accumulated balance due to employees, at the time of payment of accumulated balance due to the employee, deduct income tax thereon @ 10% if the amount of such payment or aggregate of such payment exceeds Rs 50,000/-

2) Taxability of Lump Sum payment received from Un recognized provident fund:

(i) Payment received in respect of employer’s contribution andinterest thereon is taxable under the head “Salaries”

(ii) Payment received in respect of interest on employee’s contribution is taxable under the head ”Income from other sources”.

(iii) Payment received in respect of employee’s contribution is not chargeable to tax.

Different Types of PF Forms for Employees:

For different types of purposes, different forms have been specified under the act. The forms are as follows: