Provident fund is a fund created by the employer’s in which a certain percentage of the basic salary is contributed every month by the employer and the employee. On the other hand, the pension fund is a fund established by the employer in which a certain percentage of employee’s salary is contributed month on month by the employer.
At present, employees are regarded as assets of the company are they are responsible for its performance and position in the market. In fact, the success and failure of any company lie on the shoulders of its employees. For the purpose of retaining the efficient and hardworking employees for a long time, there are many allowances perquisites offered by the employer. One such scheme is to give them retirement and old age benefits so that they will not have to struggle at the later stage of life. Here we are talking about the provident fund and pension fund.
There are a number of differences between provident fund and pension fund, which are described in the article below.
Content: Provident Fund and Pension Fund
|Basis for Comparison||Provident Fund||Pension Fund|
|Meaning||A fund in which employer and employee makes a contribution while an employee is in employment with the organization is known as Provident Fund.||A fund created by the employer in which he contributes an amount, for providing retirement benefits to the employee is known as Pension Fund.|
|Who is eligible to make a contribution?||Both employer and employee||Employer and Central Government|
|Statute||Employee's Provident Fund Scheme, 1952||Employee's Pension Fund Scheme, 1995|
|Nature of amount received||Lump sum||Either in lump sum or in the form of regular income, depends on the pension opted by the member.|
|Basis of amount||The contribution made by both the parties, plus interest thereon.||The pension amount will the based on an average of last 12 month's salary and years of service.|
|Withdrawal||A person can withdraw the entire amount of provident fund.||Only one third amount can be withdrawn.|
Definition of Provident Fund
Provident means to provide for future and fund refers to a sum of money kept aside for a particular purpose. Therefore, the term provident fund (PF) means keeping a certain sum of money aside to provide retirement benefits. In this scheme, a specified sum is subtracted from the employee’s salary and transferred towards the fund in the form of his contribution. The employer also participates in contributing money to the fund. The rate of contribution to PF is 12%.
The employee’s account is credited with the amount of interest received from investing the contribution of both the parties in approved securities. At the time of the employee’s retirement or resignation, the accumulated amount of the fund is paid to him. However, if the employee dies, the same is given to his legal representatives. The given are the types of Provident Fund:
- Statutory Provident Fund (SPF): Statutory Provident Fund applies to the persons who are in employment with the government, university, etc., whether it is central, state or local self. The amount received is fully exempt from tax.
- Recognized Provident Fund (RPF): This applies to the establishment which employs 20 or more persons. The Fund is recognized by the Commissioner of income tax. The amount received on maturity will be free from tax only if:
- The employee served for more than five years.
- The employee served for less than five years and the reason for termination is due to ill-health or employer’s business ceases to exist etc.
- Unrecognized Provident Fund (URPF): Unrecognized Provident Fund is a fund started by the employer and employees of the organization, but not recognized by the Commissioner of Income Tax. Leaving employee’s contribution, the rest of the amount is taxable as income from salary.
- Public Provident Fund (PPF): This is a provident fund scheme for the self-employed person, in which they can make a contribution of Rs 500 to Rs. 150000 per year. The amount received and contributed is fully exempt from tax.
Definition of Pension Fund
In simple terms, the word pension means regular payments made by the government or any other employers to their employees, for the services rendered by them in the past.Pension fund implies a fund in which the employer contributes an amount for providing the following benefits like superannuation, retirement, disability and others.
The fund is financed by the transferring a part of employer’s contribution towards an employee’s provident fund to pension fund i.e. when the employer contributes 12% to provident fund, 3.67% is contributed to the provident fund and rest is diverted towards pension scheme. Central Government also contributes to the pension fund at a rate of 1.16% of the pay of the employee provided certain conditions are fulfilled.
On the retirement of the employee, he will get periodic payments of a specified sum such pension is known as uncommuted pension which. However, the employee can also opt for commuted pension whereby he can get the entire or part amount in a lump sum.
Key Differences Between Provident Fund and Pension Fund
The following are the major differences between provident fund and pension fund:
- Provident Fund is a kind of fund in which employer and employee make a contribution during the service of the employee to provide for future benefits. Pension Fund, on the other hand, is also a fund in which employer contributes a specified sum to provide retirement benefits to the employee as a consideration for his past services.
- In provident fund, both employer and employee contribute to the fund, but in the case of pension fund employer and central government contribute to the fund.
- Provident Fund works under the Employee Provident Fund Scheme, 1952 whereas Pension Fund works under Employees Pension Fund Scheme, 1995.
- The amount received by an employee in Provident Fund is in a lump sum. Conversely, it is up to the employee whether he wants to commute his pension or not in the case of the pension fund.
- In Provident fund, the amount received is an aggregate of the contribution made by both the parties and interest thereon. In contrast to the pension fund, the basis of pension is an average of 12 month’s last drawn salary and period of service.
Provident Fund and Pension Fund are two schemes of government, in which an employee can get consideration for his services rendered by him for years. An employee can withdraw the whole or part of an amount in the provident fund when he is in need of it, like the construction of the house, illness, marriage or education, etc. However, the only one-third amount can be withdrawn in case of the pension fund.
ANSHUL NIGAM says
Very nicely written article!
Very good article. For Pension scheme, there is no clarity in 10 years of service. whether 10 years of service in same organization, or it can be from different organization. If only in same organization, then what is the policy if earlier company acquired by present company and PF account also transferred to new PF account. If anybody explains it would be great.
Ratan Mahale says
my pf account is more than 10 years in a single company. can i withdraw the pension amount fully. Can you please suggest me on this.
Clears all doubts