What is Provident Fund and how is it calculated ?

Provident Fund is the fund which is composed of the contributions made the employee during the time he has worked along with an equal contribution by his employers. It is calculated as a percentage of his salary, say, 12 % and is returned to him on his retirement.

The provident fund was originally set up in a bid to provide monetary security to employees when they retire. Too often, people find that the golden years of their life are years marked by financial inadequacy and dependency on relatives or children. The provident fund is designed to provide the retiring individual with dignity and security. However, it has, over the years, developed into a broad plan for social security which covers the retirement, buying houses, medical expenses and related expenses.

There are different types of Provident Funds. They are :-

- Statutory Provident Funds: - All industries and establishments that employ 20 or more people are bound to contribute towards these funds. These funds specifically cover those whose income is below a certain limit prescribed by the government. 

- Voluntary Provident Funds: - The contributions to this fund are voluntary. This is applicable for all those whose salary is beyond the limit specified by the government. 

- Recognized Provident Fund: - This is a fund wherein the contributions are recognized for income tax calculations. 

- Unrecognized Provident Fund: - As the name suggests, contribution to these funds are not recognized by the Government. 

- Public Provident Fund: - This kind of Provident fund is designed for self-employed people like doctors, lawyers, engineers, businessmen etc.

A person who is a member of a provident fund can withdraw money from the fund upto a maximum ceiling set by the government after attaining a certain age, say, 54 or at actual retirement. In addition there are, generally, provisions for withdrawal of the amount, such as, acquisition or construction of property or repayment of loans taken for the same, treatment of illness, for marriage expenses, for purchase of equipment to alleviate the hardships caused by handicap etc.

In countries such as Singapore, the savings and the interest accrued are diverted into three separate accounts. The savings and interest are tax-free both at the time of deposit and withdrawal.

The three accounts are :-

1. The Ordinary account: The ordinary account contains funds which can be used for retirement and for expenses such as buying a house, insurance, etc.

2. The Medisave account: The money in this account can be used for medical expenses.

3. The Special account: Money which can be used during emergencies in old age is contained in this account.