Understanding Provident Fund Contributions and EPF Structure for Employers and Employees

Hello all,

Please help me understand why the provident fund (PF), which is 12% of the basic salary, is divided into two forms - one being 8.33% and the other 3.67%. Where does each portion go? Could you please explain this?

Thank you.

Hi Rithika,

Employee contribution to PF is 12%.

Employer contribution to PF is 3.67%.

Employees' family pension fund contribution is 8.33%.

Regards,
M. Dhanasekar

Apart from the above admin charges, the deductions are as follows:
- 1.10% of basic
- 0.5% of basic
- 0.01% of basic

Altogether, the total provident fund contribution for employers is 13.61%.

Thank you, Mr. DHANA.M. Would you please elaborate on the second point you explained? I need more clarification.

Hi,

For employers, the total PF contribution with the family pension fund is 13.61%, inclusive of all the above charges.

Now, PF admin charges have been changed from 1.10% to 0.85%. So, altogether, PF is 13.36% for employers.

Dear Ritika,

When you deduct PF from an employee's salary, it is at a rate of 12%. However, when you deposit the PF, there are certain other fields mentioned in the challan. They are shown as A/c No. 01, 10, 2, 21 & 22.

1. Employee Contribution (A/c No 1) is at 12% of Basic and DA.
2. Employer Contribution is at 12%, further divided into two parts: (a) Pension Fund (A/c No 10) at 8.33% and (b) EPF (A/c No. 1) at 3.67%. The (b) is deposited under EPF similar to employee contribution.
3. Admin Charges (A/c No. 02) at 1.1% of Basic and DA or Rs. 500/-, whichever is higher.
4. EDLI Charges (A/c No 21) at 0.50% (Employee Deposit-Linked Insurance).
5. Inspection Charges (A/c No. 22) at 0.01% or Rs. 200/-, whichever is higher.

Please note that if any employee draws a basic salary of more than Rs. 15000, under A/c No. 10 (Pension Fund), a maximum of Rs. 1250 can be deposited. The difference amount of the employer contribution will then be shifted to A/c No. 01 (EPF).

For instance, if the Basic is Rs. 20000, the contributions would be Rs. 2400 (Employer Contribution- No. 01), Rs. 1250 (Employer Contribution, A/c-10, being the maximum limit), and Rs. 1150 (Employer contribution-A/c 01).

However, the other heads will be deposited as per the percentage and minimum limit criteria.

I hope your basics for EPF are now clear.

Best regards,
[Your Name]

Thank you so much for making the concept clear. I have one more question that I posted yesterday but didn't receive any answer. Please answer. Is there a need to deduct PF and ESI for an employee who is on a contract basis and hired directly by the company, not by a contractor? Is it official or mandatory here?

Dear Ritika,

When a company recruits contract employees and then includes them in their payroll, the contract employees become on-roll employees. There is no specific act that dictates the transition of a contract employee to an on-roll employee.

If you have contract employees in your factory, you may not directly pay the ESI and EPF for them. However, you need to regularize the company's payment of these benefits for them. If you have a significant number of employees, it is essential to refer to the Contract Labour Regulation and Abolition Act (CLRA) and ensure compliance with all the rules outlined in the act.

Please review and implement these guidelines for managing contract employees effectively.

Thank you.

Hi Ritika
Scheme Name Employee contribution Employer contribution
Employee provident fund 12% 3.67%
Employees’ Pension scheme 0 8.33%
Employees Deposit linked insurance 0 0.5%
EPF Administrative charges 0 1.1%
EDLIS Administrative charges 0 0.01%

As the principal employer, it is your responsibility to pay PF and ESI for the contract labor, either through the contractor or directly as the principal employer.

Dear Ratika,

The status regarding the contractual employee for PF-ESI depends upon the nature of the job, appointment letter, salary structure, and ethics of your company. If you really want to cover the employee under PF-ESI, you can do so as per compliance.

However, if the specific employee is on higher remuneration/salary, you can exclude him from PF and ESI. In that case, you have to come to an agreement with him that you are hiring him for some professional services. The agreement should have a valid period, amount (monthly/annual), payment terms, specific nature of the job, termination clause, and other legal clauses. In that case, the person will be treated as a "Contractor" in your company. For his services, he will raise an invoice (monthly) for the agreed amount. You have to process the bill to the accounts department like a vendor/contractor bill, and accordingly, payment will be released.

The major difficulty for you and him will be that "you have to deduct TDS from his payment as per government norms."

After the closing of the financial year, he can claim a refund of the TDS through ITR. If his remuneration is under the tax-free slab, he will get a full refund. However, if his remuneration exceeds the tax-free limit, the refund can be claimed after necessary tax deductions from the total TDS amount.

I hope that the matter is now clear to you.