Understanding PF and Tax Deduction in Employee Salaries in India with Examples of Percentage Deductions

 In India, employee salaries include specific deductions, mainly the Provident Fund (PF) and Income Tax. These deductions serve essential functions: PF for retirement security and tax deductions to contribute to national development.

Provident Fund (PF) Contribution

The Provident Fund (PF) is a retirement benefit scheme where both the employee and the employer contribute a fixed percentage of the employee's salary each month. In India, 12% of the employee’s basic salary is contributed by both the employer and employee toward the PF account. Out of the employer's 12%, 8.33% goes to the Employee Pension Scheme (EPS), and the remaining 3.67% is added to the PF.

Example:

• If an employee's basic salary is ₹25,000:
  • Employee contribution: 12% of ₹25,000 = ₹3,000
  • Employer contribution: 12% of ₹25,000 = ₹3,000 (with ₹2,083 to EPS and ₹917 to PF)

This monthly contribution grows over time and provides a financial safety net upon retirement.

Income Tax Deduction

Income tax in India is deducted at source by the employer based on the employee's salary and tax bracket. The income tax rates for individuals differ according to their income levels. Here’s an example based on the new tax regime (FY 2023-24):

1. Up to ₹2.5 lakhs - No tax
2. ₹2.5 lakhs - ₹5 lakhs - 5%
3. ₹5 lakhs - ₹7.5 lakhs - 10%
4. ₹7.5 lakhs - ₹10 lakhs - 15%
5. ₹10 lakhs - ₹12.5 lakhs - 20%
6. ₹12.5 lakhs - ₹15 lakhs - 25%
7. Above ₹15 lakhs - 30%

Additionally, a 4% Health and Education Cess is applied on the tax amount.

Example:

• If an employee's annual income is ₹8,00,000:
  • Income from ₹2.5 lakhs to ₹5 lakhs is taxed at 5% = ₹12,500
  • Income from ₹5 lakhs to ₹7.5 lakhs is taxed at 10% = ₹25,000
  • Income from ₹7.5 lakhs to ₹8 lakhs is taxed at 15% = ₹7,500
  • Total tax = ₹12,500 + ₹25,000 + ₹7,500 = ₹45,000
  • Adding 4% cess: ₹45,000 * 1.04 = ₹46,800

The total tax deduction for the year will be ₹46,800, divided monthly.

Countries with the lowest income taxes include UAE, Saudi Arabia, Qatar, Bermuda, and the Cayman Islands, where salaried employees face little to no income tax. In contrast, high-tax countries like Sweden, Denmark, Japan, Austria, and Finland have high rates, especially for top earners, funding extensive social services. Low-tax nations often rely on alternative revenue sources

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