Provident Fund (PF): Meaning, Benefits, And Different Account Types
All working individuals worry about their future. In most countries, the retirement age is capped at 60. However, life doesn’t end at 60. and there’s a lot more left to do and many life-changing decisions to make. This is where a provident fund comes in.
It is a lump sum amount of money that employees can avail once they retire. It can come in handy during the volatile period of retirement when a significant sum of money is needed at once. But the concept of provident funds confuses many people. On that note, we bring you this detailed guide on the provident fund, its benefits and types.
What is a Provident Fund?
A provident fund (PF) is also called retirement fund and is used to provide a lump sum or monthly payments to salaried employees when they retire. It is a fixed amount of money that's contributed by employees from their salary till retirement.
What are the benefits of a provident fund?
The provident fund provides good investment opportunities to individuals upon retirement. The one-time inflow of money can aid them in changing homes, opening new businesses, education of dependents, medical emergencies or just investing in mutual funds.
Type of Provident funds
There are various types of provident funds; some are exclusive to government employees while others are meant for private employees. However, the government regulates provident funds and in India, the authority lies with the Employees' Provident Fund Organisation (EPFO). Take a look at some common types of provident funds.
Employees Provident Fund (EPF)
Employee Provident Fund, also known as a Recognized Provident Fund, is the most popular type of PF in India. All businesses or corporations with more than 20 employees must offer retirement benefits to the employees and contribute to the PF. Since most Indians are employed by private businesses, they prefer EPF accounts. It has several pros and cons as well.
It offers higher interest rates between 8-9 per cent. And the best thing about EPF is that the amount that the employee pays is matched by the employer as well, and a major part of the sum is handed out at the time of retirement. The rest is paid in instalments as a pension. EPF matures only on retirement, and the amount received is tax-free as long as the employee has been working with the company for more than 5 years.
Per recent rules, interest on deposits over ₹ 2.5 lakhs in a year is taxed from the employee.
Public Provident Fund (PPF)
The Public Provident Fund is available for everyone in India and can be opened by both permanently employed or self-employed individuals. This type of account can be opened by anyone as long as they are a resident of India.
The minimum amount to be deposited is ₹500, and the maximum is ₹1.5 lacs in a financial year. The amount is paid after 15 years at pre-decided rates fixed by the central government every quarter. PPF amounts received on maturity are tax-free, no matter how big the sum is.
PPF is mainly a savings scheme, while EPF also offers pensionary benefits. That is the key difference between the two.
General Provident Fund (GPF)
General Provident Fund is also known as the Statutory Provident Fund. It is only available for government servants, be they permanent employees, re-employed pensioners, or temporary employees with at least one year of service. They are eligible to open a GPF account.
6 per cent of the monthly salary has to be contributed to the GPF account. The interest rate is adjusted by the government and ranges between 7-8 per cent.