What is PF

According to data collected in the 2011 census, there are approximately 104 million individuals above 60 years residing in India. Among them, most need a sustainable source of regular income and depend on their savings to cover daily expenses. To facilitate them, the government, over the years, has introduced several schemes that allow individuals to gather a substantial savings corpus post-retirement. One of the most popular among them is the Provident Fund.

What is PF?

Provident Fund is a government-backed savings scheme that allows individuals to gather a sizeable corpus over the years. It requires individuals to contribute a percentage of their monthly income to create a pension fund. Over the years, the contributory amount gets accrued and can be accessed after the individual’s retirement. In the face of Indian market volatility, you should invest in Provident Funds, fixed deposits and other schemes.

You should first learn about the three principal types of Provident Funds in India to know what PF is. These are –

General Provident Fund

This is an account that is available only for government employees. To partake in this scheme, government employees must contribute a portion of their monthly salary to the GPF account. Government notifications, which are revised occasionally, provide interest in GPF. Currently, the interest on GPF is pegged at 7.9% per annum.

Employee Provident Fund

This Provident Fund type applies to all privately owned organisations with more than 20 employees. Here, employees are required to contribute a portion of their salary to the fund, whereas the employer contributes a similar amount, on which the government provides an interest. The accumulated corpus in this fund can be accessed post-retirement, during unemployment or under certain exceptional circumstances.

Public Provident Fund

PPF investment is a scheme where an individual voluntarily invests a portion of their income on which the government offers an interest. PPF mandates a minimum and maximum investment of Rs. 500 and Rs. 1.5 Lakh, respectively. It also has a fixed maturity period of 15 years, after which investors can withdraw from the account.

Provident Funds are among the most popular schemes that individuals invest in to plan their post-retirement life.

Alternatively, many choose to forego these schemes, owing to their tenor restrictions, in favour of fixed deposit accounts.

How is interest on Provident Fund calculated?

  • To calculate PF interest, you should first understand the basics of how the computation is done.
  • The interest on Provident Funds is calculated at the end of each month, but the deposit is made cumulatively at the end of each year.
  • Let us now look at how the interest is calculated with the help of an example.
  • An individual’s salary consists of two components – Basic wage and dearness allowance.
  • Let us assume, Basic salary + dearness allowance = Rs. 20,000
  • The employee’s contribution towards EFP = 12% of Rs. 20,000 = Rs. 2,400
  • Employer’s contribution towards Employees’ Pension Scheme = 8.33% of Rs. 20,000 = Rs. 1,666.
  • Employer’s contribution towards EPF = Employee contribution – Employer’s contribution towards Employee Pension Scheme= Rs. 734.
  • Therefore, each month's total EPFO contribution = Rs. (2400+734) = Rs. 3,134.
  • Interest on EPFO is calculated monthly = 8.65/12 = 0.72%
  • Therefore, interest on EPFO = Rs. (6268x 0.72%) = Rs. 45.12.
  • Thus, Rs. 45.12 is calculated as interest on an individual’s account every month.
  • Alternatively, individuals can use an online PF calculator to know their interests more efficiently.
  • What are the benefits that one can enjoy through PF?
  • Now that you know what isPF is, look at the benefits salaried individuals enjoy joys with them.

Tax benefits

An employee’s contribution is eligible for tax exemption under Section 80C of the Income Tax Act. Further, the interest earned from the account is also exempted from taxation. Withdrawals from EPF are also not taxable if an individual continues his/her service for five consecutive years.


Of the 12% contribution that employees make towards EPF, 8.33% goes towards the Employees’ Pension Scheme. According to rules set forth by EPS, 10 straight years of contribution towards EPS ensure lifelong pensions for individuals.

Pre-mature withdrawal

EPFO allows pre-mature withdrawal of funds from the account under exceptional circumstances after 5-10 years of service by an individual. But the body strongly advises against it to help individuals maximise their benefits.

That is why, alternatively, you can park your savings in a Fixed Deposit account offered by financial institutions like Bajaj Finance.

This account offers similar benefits to PF without stringent withdrawal restrictions. You can choose a short-term or long-term FD, according to your convenience.