Understanding provident fund and public provident fund

A provident fund is a mandatory retirement savings scheme for employees that is managed by the government. An employee gives a portion of his or her salary to the provident fund every month. And his employer too makes a contribution on behalf of the employee.

Month after month, these savings continue to build the retirement corpus, which is managed by the government. It also attracts an annual compound interest. For the fiscal 2020-21, the government has approved an 8.5 per cent rate of interest on the employees’ provident fund. And on retirement, the employee gets a good amount of money when he needs it the most.

If an employee holds a rightful claim to the PF associated with their company or firm, they will be given a Universal Account Number, which enables them to transfer their PF funds from one employer to another whenever they move from one job to the next. Apart from India, several other developing countries like Singapore have the compulsory provident fund.

There are three types of provident funds. The first one is the general provident fund. It is a type of PF that is maintained by government bodies such as the Railways, local authorities, and other similar bodies. Then there is the recognised provident fund. This is the one that applies to all privately-owned organisations that have more than 20 employees.

And the third one is public provident fund or PPF. It is voluntary in nature. The interest earned and the returns under this scheme are not taxable under Income Tax. An employee has to open a PPF account under this scheme. The amount deposited into the account during a given year will be claimed under section 80C deductions. The PPF has a minimum tenure of 15 years. Also, a minimum investment of Rs 500 and a maximum one of Rs 1.5 lakh is allowed for each financial year.

In the absence of a proper social security net, like the ones the US and other developed nations have, PF offers some cushion to workers in developing countries. 

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