Those who have worked in the industry for any length of time must be aware of these two wonderful schemes, to provide for money in times when it is needed most, that is in retirement or when one dies the money deposited in such funds is released to the family members. The major objective of a pension or a provident fund is to provide benefits to employees who opt for these schemes when they retire. If both funds have the same aim, what then is the difference? This is one question that most people grapple with, and this article attempts to highlight these differences for the benefit of the readers.
A provident fund is an account that is set up for an employee and he contributes compulsorily towards it from his salary every month. In India this amount is 12.5% of the basic salary to which a matching contribution is made by the employer. On top of this, the amount deposited in a provident fund attracts interest at the rate of 9% at present to negate the effects of inflation. When the employee retires, he gets the entire amount deposited in his provident fund along with the interest that accrued as a lump sum for the benefit of his family.
A pension account is similar in structure and also attracts interest in the same manner. The major difference between a pension fund and a provident fund lies in the fact that whereas all the money is released as benefit to the employee in case of a provident fund, only one third of the amount is given to the employee at the time of retirement in case of pension fund, while he gets remaining two thirds over his life time in installments. Thus, he gets a monthly amount just like his salary after retirement to manage a decent lifestyle.
There is another notable difference in the way benefits are taxed in pension and provident funds. While the employer may deduct up to 20% of the employees salary for tax purposes in both pension as well as provident fund, an employee has 7.5% of his salary as tax deductible in his pension fund, while there is no such benefit in case of provident fund.
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What is the difference between Pension and Provident Fund? • In a provident fund, all the deposit along with interest is released as benefit at the time of retirement in lump sum, while the employee who opts for pension fund can get a maximum of one third as a lump sum at the time of retirement while the rest amount is paid out in installments over his life time. • Pension funds offer better tax benefits to employees than provident funds • Pension funds are better if a person does not wish to do a business after retirement or does not have any immediate liabilities. • On the other hand, if he requires a big amount after retirement, provident fund is obviously better.
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