Welcome to the blog post on How Does Provident Fund Work. Provident Fund is a saving scheme introduced by the Indian government for fund accumulation for retirement. It is a compulsory fund deduction from the employee’s salary which is collected by the employer for which the employee would receive a lump sum amount on the retirement day or after changing the job. Let us dive deep into the functioning of Provident Fund, its various types, benefits, and much more.
Types of Provident Fund
Provident Fund is of two types:
- Employee Provident Fund (EPF) — This is applicable to salaried individuals and a mandatory deduction is made from their salary every month. The employer also makes a matching contribution towards the fund. EPF money can withdraw on completion of 5 years of continuous service.
- Public Provident Fund (PPF) — This fund scheme is available to everyone and used by individuals to save for their retirement. The interest earned and the amount withdrawn from this fund are tax-free, and the fund gets matured after 15 years. It is usually for self-employed individuals or those who don’t have a fixed source of income.
How Does It Work?
Provident Fund is a retirement fund scheme that provides benefits to the employees after their retirement. The employer registers the employee in any one of the Provident Fund schemes and deducts a small portion of their salary every month towards this fund. The employer also makes a matching contribution which is deposited into the employee’s account by the end of every month. The interest on the balance amount in the Provident Fund account is calculated and credited at predetermined rates which are revised every year based on the market conditions.
Benefits of Provident Fund
Some of the benefits of the Provident Fund are:
- The Provident fund ensures that employees have a financial cushion after retirement.
- The Provident Fund permits tax deductions on both the employee and employer contributions.
- The Provident Fund interest rate is higher than that of the savings account and also fully exempted from Income Tax under Section 80C of the Income Tax Act.
- The Provident Fund aids employees to create a sort of savings habit that will help them prepare for unexpected financial hardships in the future.
How to Withdraw Funds?
Provident Fund account balance can be withdrawn after the retirement or during an emergency. Below mentioned are a few guidelines on how to withdraw money:
- A complete Provident Fund withdrawal can be made by an employee after retirement or leaving the job.
- Partial Provident Fund withdrawal can also be permitted if the reason is emergency medical treatment, child education/marriage, and house construction.
- However, one must always remember that the tax implications of a Provident Withdrawal is dependent on multiple factors such as the total withdrawal amount, tenure, employer’s contribution, and more.
Conclusion
Provident Fund is an essential scheme initiating by the Indian government that guarantees financial independence and stability for employees post-retirement. An apt Provident Fund scheme selection will not only secure employees' life but also assure the right investment strategy for the long-term. Always remember to explore your Provident Fund options, understand their particularities, and make an informed decision.
