File ITR, invest & save upto
₹46,800 in taxes on the go
0% commission • Earn upto 1.5% extra returns
Reviewed by Aug 01, 2021| Updated on
A provident fund is a government-managed, mandatory retirement savings scheme used in India, Singapore, and other developing nations. These funds also share some characteristics with pension funds provided by employers.
A worker gives a portion of his/her salary to the provident fund, and an employer should make a contribution on behalf of the employees. The money in the fund is then kept and handled by the government and ultimately withdrawn by the retirees or their surviving families in some countries. In certain cases, a provident fund even pays out to the disabled, who are not in a condition to work.
Anyone who is a salaried employee will have a monthly payment with several deductions. One such deduction is for the provident fund, which is explicitly stated on an employee’s payslip.
The funds received from employees are pooled and held by a trust. The pooled funds often produce interest at a rate decided by the government. This balance continues to grow with an employee’s monthly contributions, as well as the necessary annual compound interest.
There are two ways by which an employee can withdraw his or her provident fund:
The first is the retirement age when an employee hits the age of 58. He or she will apply for withdrawal of the provident fund via his or her employer.
The second option is to terminate the provident fund before hitting the retirement age. This can be done if an employee has been out of work for a prescribed period by the government, in which case he or she will be entitled to withdraw 75% of the provident fund. It should be remembered, however, that the employer's contribution from the provident fund can only be withdrawn after age 58.
For the employees and employers, each national provident fund sets its own minimum and maximum contribution rates. Minimum contributions can vary according to the age of a worker.
Many funds encourage people to pay extra to their compensation accounts and to further support their employees for employers to do so too.
The government sets the age limit at which withdrawals that are free of penalties will begin. In special situations, such as medical emergencies, such pre-retirement withdrawals can be permitted. Those individuals who work past the minimum retirement age in many countries will face limited withdrawals before full retirement.