Types of Provident Fund
Types of Provident Fund
A provident fund is a scheme in which employers and employees both deposit 12% of the salary of the employee in the provident fund account. It’s more like contributing a part of your salary towards your salary in which your employer also contributes his share there are different types of provident funds in India.
In addition to it, the interest gets accumulated on the Provident fund account which turns out to be a large corpus that you get at your retirement. To sum up, a provident fund is the combination of employee contributions, employers' contributions, and the interest on these investments.
How did the Provident fund start?
In 1929, Britishers came up with the idea of a provident fund for the coal mine workers, and then in 1948, the Coal Mines Provident Scheme was launched. After seeing the success of this scheme, other industries also started implementing this scheme and finally, in 1952, the Employees Provident Fund Act was framed.
Purpose of Provident Fund
The main purpose of a provident fund is to ensure that the employee has adequate funds to lead a good life once he retires.
What are the Benefits of Provident Funds?
- Loan against PF: In case of emergency a PF account Holder can take loan against their PF Balance and the loan interest rate levied in only 1%. The loan must be repaid within 36 months of disbursement.
- Free insurance: EDLI scheme provides free life insurance up to Rs 7 lakh to PF account holders in case of death during the service period.
- Last but not least, the Provident Fund is growing every day. Your retirement fund will continue to grow at a steady rate regardless of how the stock market performs over time.
Types of provident funds
Depending upon the sector an employee is working in provident funds can be divided into four types:
1). Statutory Provident fund
If you are a government employee, then you are mandated to have a statutory provident fund which is directly managed by the government. This type of provident fund is mainly for government employees where the employer and employee contribute 12% of employee's basic salary and you get an interest of 8.5% p.a. on your investment.
2). Recognized provident fund
If you are working in the private sector then it depends on your company policies whether they want to have a statutory provident fund, or they want to set up their own fund which is managed by them.
If the company decides to set up its own fund, they are mandated to get approval from the Commissioner of Income Tax and once they get it, it becomes a recognized provident fund.
3). Unrecognized provident fund
A private provident fund that is not recognized by the Commissioner of Income Tax becomes an unrecognized provident fund.
4). Public Provident Fund
A public provident fund is operated under the Public provident fund act, of 1968. With the popularity of the provident fund, to give the benefits of provident fund to self-employed people public provident fund came into being. Anyone who is a resident of India can open a public provident account.
The minimum and maximum amount you can deposit in a PPF is Rs.500 and Rs.1.5 lakhs respectively. In PPF, the final amount is paid after the fixed maturity period of 15 years at a pre-decided rate that is fixed by the government every quarter and in PPF the interest rate is fixed at 7.1%.
Why PF is better than FDs?
FDs are one of the traditional ways of investing money and is trusted by many Indians but there are other safe and more rewarding investment options than FD and Provident Fund is one of those. Some of the benefits of PFs over FDs are:
- The interest rate on PFs is higher at 7.1% than FDs which are hovering at 5-6%.
- You can save your money in PFs by way of tax deduction under Section 80A of the Income Tax Act.
- As the interest rate is higher in PFs it protects you against inflation, which the FDs don’t.
Difference between PF and Gratuity?
- Both the employer and employee contribute to a PF account. On the other hand, the gratuity does not include any contribution from the employee. Gratuities are token payments given as a token of appreciation to employees.
- Employees can withdraw their PF balance by just filling in the forms, and there are different eligibilities for different reasons of withdrawal. Gratuity, on the other hand, is applicable to employees working in establishments and its eligibility is typically based on completing a minimum specified period of continuous service, often five years, with the same employer. Employees receive gratuities after they retire, resign, or are laid off.
- As of FY 2020–21, if an employer makes a contribution to the EPF fund that exceeds Rs 7.5 lakh in a year, it will be taxable. Whereas gratuities are exempted up to 20 lakhs through Section 10(10) of the Income Tax Act.
Investing and saving is an important habit that should be inculcated in every individual from an early age and a provident fund is a good investment vehicle where you could park your money to lead a secure life in the future.