How is PF calculated on salary?

The Provident Fund is a retirement scheme designed to provide sufficient funds after retirement. If you're working for a company exceeding 20 employees, a part of your salary is contributed to PF every month. Both employees and employers contribute to this fund. It becomes easier to plan your finances when you know how much PF is deducted from your salary monthly.

How can you calculate your PF balance?

You will have to consider both your and your employer's contributions, with the earned interest on it. You can easily check your existing PF balance by logging in to the EPFO portal with your Universal Account Number (UAN) and password. If you want to estimate your future corpus amount, you can use an Employee Provident Fund calculator by entering details like your age, tentative retirement age, your basic monthly salary, expected annual increment, and interest rate earned on your EPF balance.

How is EPF calculated?

Basic salary and Dearness Allowance (DA): EPF is calculated on your basic salary plus dearness allowance, if any. If your basic pay is less than ₹6,500, PF is calculated based on your gross salary. But if your basic pay is more than ₹6,500, PF is calculated on your basic pay.
Employee contribution: 12% of your basic salary and DA is deducted as your contribution.
Employer contribution: The employer also contributes the same — 12% of your basic salary and DA.

Let's understand this with an example. Let's say your salary (basic pay + DA) amounts to ₹25,000:

Calculating employer’s contribution

The employer's total contribution of 12% is divided into two parts:

3.67% of ₹25,000 = ₹917.5. This goes directly into your EPF account.
8.33% of ₹25,000 = ₹2082.5. This will be directed towards your Employee Pension Scheme (EPS).

Calculating employee’s contribution

The employee's contribution is straightforward. 12% of Basic Salary + DA, i.e., in this case — 12% of ₹25,000 = ₹3,000.

Therefore, the total contribution to your EPF account will be ₹3,917.5 in this case, on which the existing interest rate will be levied. Though the interest is calculated at each month's end, it is deposited once the financial year is complete.

Tax advantages for payments to EPF

Tax benefits for employees

Your EPF contributions are eligible for tax deduction under Section 80C of the Income Tax Act, 1961 with the limit of ₹1,50,000 per year.
The interest earned on your EPF balance is tax-free.
If you have completed five years of continuous service. the total amount you withdraw, including interest, is exempted from tax so there is no TDS.

Tax benefits for employers

The employer's contributions towards EPF and the Employee Pension Scheme are eligible for tax deduction under section 36(1)(iv) of the Income Tax Act, 1961.

Also Read: Know the difference between EPF and NPS

What is EPF eligibility?

Only salaried employees working for an organisation registered under the EPF Act and having more than 20 employees can contribute to EPF.
It is mandatory for employees earning up to ₹15,000 per month to contribute to EPF. Higher earners can contribute voluntarily.
You are eligible from the first day of joining and there is no age bar except should be more than 18 years of age.

Calculating PF and understanding other deductions will clarify the exact amount credited to your Salary Account, enabling you to access your funds from anywhere and enjoy additional banking benefits, ultimately helping you secure a retirement corpus and a stable future.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.