Understanding PF Pension Withdrawal and How to Claim It

How is Provident Fund Calculated on Your Salary?

28^th Oct 2025...

Published By : Team 811

Key Takeaways

PF is calculated on your basic salary and dearness allowance, excluding other allowances like HRA or bonuses.
Employees contribute 12% of their basic pay and DA each month, directly deducted from their salary.
Employers contribute an equal 12%, split into 3.67% for EPF and 8.33% for the Employee Pension Scheme.
PF contributions earn annual interest declared by EPFO, currently 8.25% for FY 2024–25, compounded yearly.
Both employee and employer contributions qualify for tax benefits under Section 80C of the Income Tax Act.
Withdrawals after five years of continuous service, including interest, are fully tax-exempt.
Regular PF savings, matched by the employer’s share, provide long-term security and assured retirement returns.

Every month, a small amount is deducted from your salary and credited towards your Provident Fund (PF). It may look like a routine line item on your payslip, but this deduction plays a vital role in building long-term savings. Many people know PF as a retirement benefit, but few understand exactly how it is calculated.

Knowing how PF is worked out on your salary helps you plan better for your financial future. It also gives you clarity about how much you are saving every month and how your employer contributes alongside you.

Understanding What PF Means in Your Salary

The Provident Fund (PF) is a mandatory savings scheme regulated by the Employees’ Provident Fund Organisation (EPFO). It is designed to provide financial stability after retirement. Both you and your employer contribute a portion of your salary to this fund every month.

If you work for an organisation with 20 or more employees, PF contributions are compulsory. The scheme applies to salaried individuals earning up to ₹15,000 as basic pay each month, though many employers extend the benefit to higher salaries as well.

So, when you hear the term “what is PF in salary”, it refers to the portion of your monthly income that is set aside, along with an equal contribution from your employer, to secure your future.

Also Read: Everything You Need to Know About EPF

How to Calculate Your PF Balance

Your total PF balance is made up of three components:

Your contribution (12% of basic salary and dearness allowance)
Your employer’s contribution (12% of basic salary and dearness allowance)
The interest earned on the accumulated balance

You can view your existing PF balance anytime by logging in to the EPFO Member Portal using your Universal Account Number (UAN) and password. If you want to project how much your PF could grow over the years, use an online EPF calculator. It factors in your age, basic pay, expected salary hikes, and the prevailing EPF interest rate to show your future corpus.

Also Read: What is EPFO and How Does it Work

How PF is Calculated on Your Salary

The calculation is simple once you understand the structure. Let’s look at the main components.

Basic Salary and Dearness Allowance (DA)

PF contributions are always calculated on your basic pay plus dearness allowance, if applicable. Other allowances like HRA, conveyance, or performance bonuses are not considered.

If your basic pay is less than ₹6,500 per month, PF can be calculated on your gross salary. For higher salaries, it is calculated only on your basic pay.

Employee Contribution

As an employee, you contribute 12% of your basic salary and DA every month. This amount is directly deducted from your salary and credited to your EPF account.

For example, if your basic salary plus DA is ₹25,000, your contribution will be:
12% of ₹25,000 = ₹3,000

Employer Contribution

Your employer contributes the same amount that is 12% of your basic salary and DA. However, this amount is divided into two parts:

3.67% goes to your EPF account
8.33% is directed to the Employee Pension Scheme (EPS)

So, in the above example, the employer’s ₹3,000 contribution would be split as:

₹917.50 to EPF
₹2,082.50 to EPS

Together, the total monthly contribution becomes ₹6,000 (₹3,000 from you and ₹3,000 from your employer).

A Step-by-Step Example

Let’s assume your basic salary plus DA is ₹25,000 per month.

Component	Calculation	Amount (₹)
Employee’s Contribution	12% of ₹25,000	3,000
Employer’s EPF Share	3.67% of ₹25,000	917.50
Employer’s EPS Share	8.33% of ₹25,000	2,082.50
Total Monthly Contribution		3,917.50

This total amount goes into your retirement savings each month. Over the years, the contributions add up and earn interest as declared by EPFO annually. The current interest rate (for FY 2024–25) is 8.25% per annum.

Though the interest is calculated monthly, it is credited to your account once at the end of the financial year. The compounding effect ensures your PF balance grows faster with time.

How EPF Interest is Applied

Interest is calculated on the closing balance in your account at the end of each month. For instance, if you start the year with ₹1,00,000 and contribute ₹3,000 each month, interest is applied on both your previous balance and the new contributions.

At the end of the financial year, the total interest earned is credited to your account, increasing your balance for the next year’s calculation. This compounding nature makes PF one of the most stable long-term savings tools available to salaried individuals.

Tax Advantages on PF Contributions

PF is not only a disciplined savings mechanism but also a tax-efficient investment.

For Employees

Your EPF contributions are eligible for deduction under Section 80C of the Income Tax Act, 1961, up to ₹1,50,000 per financial year.
The interest earned on your EPF balance is tax-free.
If you complete five consecutive years of service, the total withdrawal amount including interest is exempt from tax.

This means your PF serves as a completely tax-free retirement corpus when managed properly.

For Employers

Employers also enjoy tax deductions on their share of PF and pension contributions. Under Section 36(1)(iv) of the Income Tax Act, 1961, the employer’s contribution towards EPF and EPS is deductible as a business expense.

Why PF Is an Essential Part of Your Salary

PF might feel like a small deduction today, but it creates a strong foundation for your financial future. Here’s why it matters:

Assured Returns – PF offers a fixed, government-backed interest rate, making it one of the safest forms of long-term savings.
Dual Contribution – Your employer contributes an equal amount, effectively doubling your savings each month.
Tax-Free Growth – Both contributions and interest remain tax-exempt, subject to conditions.
Retirement Security – The corpus you build through PF ensures financial stability after retirement.
Emergency Withdrawals – You can withdraw partially for specific needs such as home purchase, education, or medical emergencies, following EPFO guidelines.

In short, PF gives you the best of both worlds: regular savings with guaranteed growth.

In Summary

Understanding your PF helps you see your income in a new light. It’s not just a deduction but a built-in savings plan that grows silently in the background. Every month’s contribution, combined with your employer’s share and the annual interest, becomes a powerful source of financial security later in life.

If you want to make the most of your salary while building a healthy savings habit, complement your PF with a Kotak 811 Digital Savings Account. It offers the flexibility to manage money easily through your smartphone, track expenses, and grow your savings efficiently.

PF ensures your future. Smart banking helps you make the most of your present.

FAQs

1. Is PF calculated on gross or basic salary?

PF is always calculated on basic salary plus dearness allowance, not on your gross pay. Other components such as HRA, bonuses, or incentives are excluded from PF calculation.

2. What happens if my salary exceeds ₹15,000 per month?

While the statutory limit for PF is based on ₹15,000 basic pay, many employers extend PF benefits to higher salaries voluntarily. This helps employees build a larger retirement corpus.

3. Does PF include employer contribution in the salary package?

Yes. Many companies include the employer’s PF contribution as part of the total cost-to-company (CTC). However, this amount is directly deposited into your EPF account and not paid as cash salary.

4. How can I check if the correct PF amount is deducted from my salary?

You can verify PF deductions through your payslip or by logging into the EPFO Member Portal using your UAN. The portal shows both your and your employer’s monthly contributions along with interest earned.