How to Calculate Provident Fund Deductions?
The Provident Fund system in India works pretty much on the mandates and the guidelines provided on the same by the government of India, and the Provident Fund Act 1952. The calculation to ascertain the amount of deductions to happen is not at all complex in nature. It’s a very simple calculation based on the components of the salary for the person concerned.
In case of person whose salary would comprise of components like basic, DA (dearness allowance), employee retention allowance in that case it would be a total 10% of all the three components of the salary. And the employer would also contribute an equal amount towards the Provident Fund account contribution of the employee and the same would be deposited in to the Provident Fund account for the employee.
The state would provide tax benefits and annual interests on the savings which might differ from year to year. The interest rate for the EPF is around 8% to 12% and is decided by the government and the central board of trustees. Currently for the year 2016, the rate of interest is 8.75% per annum
Again in case the salary of the employee is comprised only of Basic pay, and no DA (dearness allowance), employee retention allowance in the salary. In that case it would be a total 12% deduction from the basic components of the salary. In this case also the employer would contribute an equal amount to the employee’s contribution and the same is deposited to the Provident Fund account for the employee. The contribution from the state also remains the same. And the tax benefit is provided US 80C. However in both the cases the employee might choose for an enhanced saving of upto 100% of his basic.
Periodic or annual statements are supposed to be provided by the employer to the employees about the deposits made to the credit of the employee’s Provident Fund account which should be based on the same calculation. In case a deviation is seen, its advisable to verify the same with the employer.