Decoded: What is Provident Fund and when can you withdraw money from it?

An employees' provident fund is a government-managed retirement savings scheme for employees.

Every month, employees contribute a part of their salary towards provident fund. The goal is to receive lump sum payments with interest at the time of retirement from employment.

In India, the Employees' Provident Fund Organisation, or EPFO, is responsible for the regulation and management of provident funds. 

Now, who is eligible for provident fund?

Legally, any employee who has a monthly salary of up to Rs 15,000 is eligible. But most Indian companies offer it to all employees as part of their salary package. If you have a higher salary, you can opt out of it at the beginning of your career, if your employer so permits. If you opt for EPF, you cannot opt out of it during the time of your employment at that workplace.

Now, let's talk about the contribution.

The mandatory contribution is 12 per cent of an employee’s basic salary, credited to the employee’s account at the end of every month. The employer usually contributes a matching amount. Of the latter contribution, 3.7 per cent goes towards the provident fund component and the remaining 8.33 per cent towards pension fund.

Your employer opens the PF account for you. It is possible for you to operate it online with a Universal Account Number, or UAN. You can check your account balance and transfer your account while changing jobs. The UAN provided by EPFO is mainly used for tracking PF balance and PF claim status.

The pooled funds often earn interest at a rate decided by the government. In March 2020, the EPFO lowered the interest rate on employees’ provident fund to 8.50% for 2019-20 from 8.65% earlier. For the financial year of 2020-21, the interest rate was retained at 8.50%.

There are two ways by which you can withdraw your provident fund.

The first is when you reach the retirement age of 58 years. In this way, you apply for withdrawal of your provident fund through your employer and get your full PF corpus. Also, if you have been out of work for two months or more, you can apply and withdraw your full PF corpus after tax deduction.

Another way is to withdraw part of your corpus before retirement age in case of major life events like your marriage or your child’s marriage, or for education, purchase a house, or medical emergency. The portion the corpus that you can withdraw is different in case of each of these events. Details of these are available on the website of the EPFO.

Finance Minister Nirmala Sitharaman had announced in her Union Budget for 2021-22 that interest earned on employees’ annual contribution beyond Rs 2.5 lakh to their PF would be taxed. Taking this announcement forward, the Central Board of Direct Taxes notified the rules for these on August 31st. The threshold is higher, at Rs 5 lakh, for cases where only employees contribute to the PF, not the employer. 

Every EPF subscriber’s account will have two components — taxable and non-taxable. Interest earned will be separately calculated on both accounts from FY21-22. These new rules come into effect from April 1, 2022. So, contributions made till March 31, 2021, will be considered non-taxable. 

You can keep yourself about the new rules regarding provident fund by frequently checking the EPFO website.