Provident Fund vs Pension Fund

Provident Funds vs. Pension Funds Provident funds are funds set up by employers to which employers and employees pay a fixed percentage of their base salary each month. A pension fund, on the other hand, is a fund set up by an employer to which the employer pays a fixed percentage of an employee’s salary each month.

Employees are now considered company assets as they are responsible for the company’s performance and market position. The success or failure of a business rests on the shoulders of its employees. Employers have many benefits for retaining efficient and hardworking employees in the long term. One such system is to give pensions and retirement benefits so that they do not have to struggle in old age. Here we are talking about provident funds and pension funds.

Definition of Provident Fund

Saving means preparing for the future, and funding refers to the amount of money set aside for a specific purpose. The term retirement fund (PK) is understood to mean keeping a certain amount of money available for retirement. A certain amount is deducted from the employee’s salary and transferred to the fund in the form of contributions. employer too

  • 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.

Pension Fund

Simply put, the term pension means a regular payment to an employee by the state or other employer for services rendered in the past due to pensions, retirement benefits, disability, etc.

The fund is financed by transferring a portion of the employer’s contributions to the employee provident fund to the pension fund. H. If the employer pays her 12% to the provident fund, 3.67% will be paid to the provident fund and the rest will be diverted to the pension fund. The central government will also contribute her 1.16% of the employee’s salary to the pension fund if certain conditions are met.

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:

  1. 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.
  2. 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.
  3. Provident Fund works under the Employee Provident Fund Scheme, 1952 whereas Pension Fund works under Employees Pension Fund Scheme,  1995.
  4. 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.
  5. 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 needs 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.