Simple Economics

Provident Fund

What is Provident Fund?

Lot of employees doesn’t understand a 12% cut in their salary for provident fund and many neglect it. According to “employers provident fund act 1952”, a factory/company employing 20 or more workers is subjected to employers provident fund scheme.

Provident fund is composed of contribution made by employee and employer during his tenure of work, which is 12% of his basic salary. This 12 % is again divided into pension fund, insurance fund…

According to new guidelines employee drawing salary less than 15,000 have to compulsorily contribute 12% of his basic salary to provident fund.

Advantages of provident fund

Tax benefits ( say, if your gross salary is 25000 and basic pay is 10,000. 12% of 10,000 is 1200 so, your chargeable tax income is only 23800)
Pension benefits
Insurance benefits for family, widow in case of death
Withdrawal benefits ( if not eligible for pension, member may withdraw amount from his pension account)

Disadvantages

Money may not be sufficient for risks occur in daily life
Provident fund money is invested in government securities so, the interest rates will be less compared to mutual funds and may be even less than normal saving accounts
Inflation erodes the value of interest.

But, provident funds are a great source of investment for government schemes and also a tool of financial inclusion for policy makers.