Employee's Provident Fund Calculation - It's Not a Rocket Science !!

It's an era of smart investment as investors have access to the global market, which ultimately enhances knowledge, transparency, and access to lots and lots of information and data. The service sector covers 53.89% of India's total gross value added of 179.15 lakh crore Indian rupees. In India, approximately 1.23 lakh employee provident fund account holders have more than 62,000 crore in total contributions. Also, according to a survey, approximately 4.5 shareholders are contributing their hard-earned money on a month-to-month basis to the Employees' Provident Fund Organisation.

It's been noticed that some of the employees have doubts about employee provident fund calculations. Employees sometimes get stuck in getting transparent information on the calculation methodology used when an amount is deducted from their salary as a contribution. Ultimately, it's hard-earned money, and each and every person who is investing has the full right to know the calculations.

My personal opinion to all the salaried investors who are looking for stable income, without risking money in equity or any other mode, is that one can always increase the percentage of EPF deduction or contribution from salary each year. Currently, EPFO investments are giving more than 8% fixed rate of return or interest, which is not offered by any banks or any financial instruments, and even senior citizens are getting less than 1% return on FDs.

An employee must follow some guidelines each year if looking for more investment in EPF:

1. There is a timeline to select an increase in the percentage of EPF contribution if any employee wants to contribute more than 12%.
2. The appropriate HR team needs to be notified.
3. Each year, employees need to get the increased percentage details updated on the salary or workday portals, as there is no policy of auto-renewal of the percentages above 12%.
4. Employees can only opt out once a year.
5. The deducted contribution amount is eligible to be claimed under income tax slab 80C.

Lets understand the Calculation methodology:

Kindly Note: 12% of Employer's contribution is divided into two parts, 8.33% towards employee's pension scheme (EPS) and remaining 3.67% towards provident fund.

Basic Pay: It consists of standard rate of pay before any additional payments like Bonus etc.

DA: If any one wants to calculate take home salary, to calculate dearness allowance its needs to be added to basic salary.

Let's understand the calculation Scenario's where Employees Salary is above or below Rs 15,000, as there is variation in calculation %.

Note: Based on the above example, there is some additional percentage of the amount of which the employer's total contribution consists, which is around 13.61%. So that means an additional 1.61% is paid by the employer to EDLI (Employee Deposit Linked Insurance) and EPF as administration charges (approximately 1.1% and 0.01%). Also, an extra amount is paid to EDLI, which is 0.5%, by the employer.

Note: Employee contribution amount can be 10% if the total employee in an organization has less than 20 employees. Also if the total losses incurred that are more than its entire total net worth.

Companies dealing in Beedi, Brick, Gum , Jute etc also can only provide 10% EPF.

Extra benefit to Female Employees:

Based on the 2018-19 union budget policy, new women employees can make a modification to their EPF contribution amount of 8% instead of 12%. In the initial three years of employment, this facility can be availed of. This enables women employees to earn a higher take-home salary or in-hand pay, and an organisation can also focus on hiring more female employees and maintain a fair gender ratio.

"Courage taught me no matter how bad a crisis gets ... any sound investment will eventually pay off." — Carlos Slim Helu