Provident Fund (PF) is an important part of an employee’s salary structure. It is a mandatory contribution made by both the employee and the employer towards a retirement fund. The contribution is calculated on the basic salary of an employee. In this blog, we will explain how PF is calculated on the basic salary.
Basic Salary
The basic salary is the fixed amount that an employee receives before any allowances or deductions. It is a crucial component of an employee’s salary structure as other components such as Dearness Allowance, House Rent Allowance, etc. are calculated on the basic salary.
Calculation of PF on Basic Salary
PF is calculated on the basic salary of an employee. The contribution towards PF is divided into two parts – the employee’s contribution and the employer’s contribution.
Employee’s Contribution
The employee’s contribution towards PF is 12% of the basic salary. For example, if the basic salary of an employee is Rs. 20,000, then the employee’s contribution towards PF will be Rs. 2,400 (12% of Rs. 20,000).
Employer’s Contribution
The employer’s contribution towards PF is also 12% of the basic salary. However, the employer’s contribution is divided into two parts – 3.67% towards the Employee Provident Fund (EPF) and 8.33% towards the Employee Pension Scheme (EPS). The maximum contribution towards EPS is Rs. 1,250.
Let’s understand this with an example. If the basic salary of an employee is Rs. 20,000, then the employer’s contribution towards PF will be calculated as follows:
- Employee Provident Fund (EPF) contribution = 3.67% of Rs. 20,000 = Rs. 734
- Employee Pension Scheme (EPS) contribution = 8.33% of Rs. 20,000 = Rs. 1,666 (subject to a maximum of Rs. 1,250)
- Total Employer’s contribution towards PF = Rs. 734 + Rs. 1,250 = Rs. 1,984
Therefore, the total PF contribution (Employee’s and Employer’s) for an employee with a basic salary of Rs. 20,000 will be Rs. 4,384 (Rs. 2,400 + Rs. 1,984).
Conclusion:
PF is an important component of an employee’s salary structure. The contribution towards PF is calculated on the basic salary of an employee. The employee’s contribution towards PF is 12% of the basic salary, and the employer’s contribution is also 12% of the basic salary, with 3.67% towards the Employee Provident Fund (EPF) and 8.33% towards the Employee Pension Scheme (EPS). The maximum contribution towards EPS is Rs. 1,250. It is essential for employees to understand the calculation of PF on their basic salary to ensure that they receive the correct contribution towards their retirement fund.
