Provident Fund deduction for salaried professionals- How much gets deducted?

Question

I am an employee based in USA. Currently, I am negotiating salary for a position based in Mumbai. I am trying to understand how Provident Fund contributions and taxation works.

I read that 12% of your salary gets deducted from your paycheck and gets invested in your Provident Fund and employer contributes an equal amount (12%). But then, I also read that one cannot contribute more than 1 Lakh in PF. How does this exactly work- I am getting confused:

If I were hypothetically earning 24 Lakh annually, how much would get deducted towards PF?

Would employer match my contribution? – Is it is like free money because he is contributing for me and I own that money?

What about the 1 Lakh cap rule if I can contribute 12% of my salary?

Most importantly, will I get taxed??? Is it on 24lakh MINUS 1 Lakh or 24Lakh MINUS 12%??

Is the total contribution (employer and employee) exempt from tax?

This is confusing to me. Please help- very much appreciated

Answer 1

your contribution is exempted up to 1 lac.  employer contribution is fully exempted

Answer 2

Assuming the entire 24 lakh to be taxable, your contribution to PF wqould be 2.88 lakh (@12% of Basic+DA). The Employer also contributes 2.88 lakh. Generally, this is not free money; if the Employer states the CTC as 24 lakh p.a., then your actual pay will be reduced by that much amount of PF contribution.

As mentioned by JSS, the 1,00,000 cap is for investments under Chapter VI which is limited to 1,00,000 of which PF is a part. In your case since PF itself exceeds 1,00,000, your investment limit is already complete; you will get tax benefit for upto 1,00,000 only.

Only your contribution is exempt from tax - the Employer's contribution does not come into picture at all.

Tax calculation is on 24 lakh minus 1 lakh since your 12% exceeds 1 lakh. Again this is not entirely true since the actual taxation depends on your pay breakup (in terms of basic, DA, HRA etc).

If you have the pay structure given to you, I suggest you use a tax calculator; one such is at http://prrajan-tax.blogspot.com/2008/03/...

Answer 3

1) Your employer will deduct 12% of your basic salaries and will contribute similar amount. Thus 24% of your basic salaries will get ccumulated in your provident fund account. However, you can contribute above 12% provided your employer is comfortable (probably they are never) and in such case his contribution will remain at 12%. In short you can contribute more than one lakh.

2) Income Tax Act allows benefit to anyone upto Rs. one lakh. Investment above one lakh will never benefit u/s 80C.

3) You forget about the amount contributed by your employer as your employer will be claiming it as expenses. However, the amounts contributed by employer will be yours.

4) To get more (apart from one lakh of Pf) benefit of Income Tax you have to adopt other measures like mediclaim policy, donation to approved charitable trust/organisation, expenses done on handicapped family member and more.....

5) You should not feel confused and go ahead speedily. Otherwise your friends and family members will also get confused.

Answer 4

As per the Act, the member has to contribute at the rate of  12% of his basic pay, D.A. & retaining allowance if any. In case the member wants to contribute more than this, voluntarily he can do so at any rate he desires. i.e. upto 100% of basic and D.A. But the employer is not bound to contribute at the enhanced rate.

Answer 5

Total deductible investment under section 80C, 80CCC and 80CCD shall not exceed Rs. 1 lac.

http://mytaxes.in/index.php?topic=24.0

Also read Income From Salary, for allowances

http://mytaxes.in/index.php?topic=17.0

Answer 6

Dear sir,

Since you have raised the point of Provident fund and its treatment in income tax I am keepling my reply restricted to PF only.

1 PF is deducted on the basic salary. CUrrently the rate is 12% of the basic salary. The employer also contribute the same amount .

2 here one point is very important as per the provisons of the provident fund rule the contribution to PRovident fund beyond the salary of Rs 6500/- is optional so please get it confirmed from your new employer that on what amount will he deduct the PF

3 Regarding the tax benifit please not that the employer contribution is entirly tax free but rebate agaisnt your contribution woold br restriced to Rs 1,00,000/- u/s 80C