During life time as person has to achieve lot of mile stone i.e His own marriage, marriage of his son and daughter, higher education, Medical exigencies, construction and Purchase of House. Besides these requirement he has also have to save money for his old age requirement when he will become to old and not able to working for earning of his bread and butter.

To Ensure that he is not out of money at the time of these requirements government of india enact Provident fund act this act is now known as Employee’s provident funds & Miscellaneous provisions Act,1952.

It is administered and managed by the Central Board of Trustees that consists of representatives from three parties, namely, the government, the employers and the employees. The Employees’ Provident Fund Organization (EPFO) assists this board in its activities. EPFO works under the direct jurisdiction of the government and is managed through the Ministry of Labour and Employment

EPFO is one of the World’s largest social security organization in terms of clientele and volume of financial transactions. As per Annual report of 2015-2016 it maintain 17.14 crore accounts of members.

Benefit of Provident fund:

1. This is highly secured and protected investment as fund remain with Government

2. As per provident fund act, periodically Audit of P trust is mandatory.

3. PF fund can be invested only specified security

4. There are benefit of compounding growth rate as interest is being paid on cumulative basis.

5. Contribution in Provident fund trust and yearly Interest and money received on accumulation is tax exempt.

6. A member can nominate family member to received fund after his demise

7. It provide lifelong pension on completion of 10 year of contributory membership

8. All salaried employees are eligible for provident fund; this is retirement benefit that goes from salary of every month.

Primary goal of provident fund is long-term investment and withdrawn from provident fund should be opt only as last option.

In case of provident fund is not being contributed into provident fund account or committed default online complain can be file. Status of complaint can be view online.

Tax benefit on contribution of Provident fund:

As provident fund works on EEE (Exempt on investment, interest earned on contribution is exempted, amount received on maturity is also tax exempted.

There is no taxation on investment and deposit of PF, subject to some conditions. Thus, besides benefit of compounding interest rate employee can also get benefit of Tax exemption.

Particulars Recognised PF Unrecognised PF Statutory PF
Employer’s Contribution Contribution to 12% of salary is exempt, above that is added to salary income of the employee. Not taxable Not taxable
Employer’s Contribution Section 80C Deduction No Section 80C deduction Section 80C deduction
Interest on PF Any interest over and above 9.5% is add to Income from Salaries. Until 9.5% interest is exempt Not taxable Exempt
Amount withdrew at retirement time Exempt subject to certain conditions Contribution from employer and interest on that is taxable under the head Income from Salaries; Contribution by an employee is not taxable, and employee’s contribution interest is taxable under the head Income from Other Sources. Exempt

Conditions on which PF withdrawal before five years will be tax exempt:
1. Employee leaves the job after five years of employment; or
2. Where the service period is less than five years, the reason for termination is discontinuance of employer’s business or ill health or
3. The balance in RPF is re- assigned to RPF with the new employer on re-employment.

If Amount is withdrawal before completion of five years continuous service, this will be treated in following ways:

1. Employer contribution: the amount contributed by employer will become taxable in hand of employees as income from other sources.

2. Employee contribution: Amount contributed by employee contribution will be taxable as salary income to the extent of contribution amount, which has been allowed deduction under section 80C.

3. Interest income earned on entire contribution i.e employee and employer contribution will be treated as income and will be chargeable under head income from other sources.

Contribution in Provident fund:

From below two scenario we can take out how minor change in contribution effect amount of corpuse

Scenario 1

This total corpus at the time of retirement would be 1.16 crore, assuming that he is doing continuous job for 33 year i.e up to age of retirement and interest rate on pf is 8.5%, and employees start Job at basic salary of 20k (Assuming his total salary is 50 k, and forty percent of salary he get as basic.)

Corpus
after year PF Contribution Interest PF Contribution Total Age of contributory
10 5,48,910 2,73,548 8,22,458 35 years
20 13,90,572 17,55,041 31,45,613 45 years
30 24,76,194 62,83,953 87,60,147 55 years
33 28,49,453 87,58,769 1,16,08,222 58 years

If he utilized 50% corpus accumulated at the time of retirement as per above table for his obligations like marriage of kids, and Housing etc, still he will be balance of Rs 56 lakh, if he investment same in Bank FD which is most secured, he would be earning sufficient amount for running of his house hold exp.

Scenario 2 :

If in above example employee also start contribution 2000/ pm as voluntary provident fund, and increase it by 5% every corpus will increase massively as below

Corpus
after year PF Contri-bution Interest PF Contri-bution VP Contri-bution Interest VPF Contri-bution Total Age of contri-butory
10 5,48,910 2,73,548 2,94,000 1,30,303 12,46,760 35 years
20 13,90,572 17,55,041 7,08,000 8,53,665 47,07,278 45 years
30 24,76,194 62,83,953 12,42,000 30,69,244 1,30,71,390 55 years
33 28,49,453 87,58,769 14,25,600 42,80,540 1,73,14,362 58 years

It is apparent from above table that by contributing 10% of basic salary as voluntary provident fund corpus will increase by approx. 58 lakh, total corpus would be 1.73 crore.

Thus by analysis of above data that a minor amount can make a big difference, thus one should do his planning of pf contribution very carefully.

From above analysis it is clear that contribution in provident fund is not only one of the secured and safe investment but also giving tax benefit on contribution, interest income and at the time of retirement big corpus is available.

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