Provident Fund Schemes and Contribution — Labour Law II Notes

Provident Fund Schemes and Contribution

Every month a small percentage vanishes from a worker’s payslip into “PF”. It does not vanish — it splits three ways: a savings pot he can withdraw, a monthly pension for his old age, and a life-insurance cover for his family. One deduction, three protections.

The three schemes and how the money is split

Section 15 empowers the Central Government to frame three linked schemes, funded by contributions under Section 17:

The Employees’ Provident Fund Scheme — the savings pot; contributions accumulate with interest and are withdrawable on retirement, resignation or in specified emergencies (illness, housing, marriage, education).
The Employees’ Pension Scheme (EPS) — a monthly pension after retirement (and family pension on death), funded by diverting part of the employer’s contribution into the pension fund.
The Employees’ Deposit-Linked Insurance Scheme (EDLI) — a lump-sum life cover paid to the family if the member dies in service, funded by a small employer contribution.

Contribution (Section 17) is the money paid to the fund. In practice the employee contributes the notified rate — currently 12% of basic wages (plus dearness allowance) — and the employer contributes a matching amount (the Code’s base rate is ten per cent, raised to 12% by notification), of which 8.33% is diverted to the pension scheme (EPS) and the balance goes to the provident fund, with a small additional employer share to EDLI and administrative charges. The employer deducts the employee’s share from wages and pays both shares to the fund; he may not recover his own share from the worker.

Section 17, Code on Social Security 2020 (contribution, in brief): the contribution payable by the employer “shall be … a specified percentage of the wages” and “the employees’ contribution shall be equal to the contribution payable by the employer …”, the employer paying both and deducting the employee’s share from wages.

In Simple Terms: Think of one 12% + 12% flow. The worker’s 12% and part of the employer’s 12% build the savings pot; 8.33% of the employer’s share buys a pension; a sliver buys life insurance. The employer collects and pays it all — he cannot make the worker bear the employer’s share.

🧩 WORKED EXAMPLE — where the deduction goes

Facts. A worker’s basic wage is ₹15,000; PF is deducted.

Rule. Employee contributes 12% of basic; employer matches 12%, of which 8.33% goes to EPS (pension) and the rest to the PF, plus EDLI.

Apply. ₹1,800 (12%) is deducted from the worker; the employer adds ₹1,800, of which ₹1,250 (8.33%) funds his pension and the balance his savings; a small further employer share funds his life cover.

Conclusion. One deduction feeds all three schemes; the employer bears his own 12% and cannot pass it to the worker.

flowchart TD
    ROOT["EPF contribution (s.17)"]:::root
    ROOT --> EE["Employee 12% of basic"]:::leaf
    ROOT --> ER["Employer 12%"]:::leaf
    EE --> PF["Provident Fund Scheme (savings, s.15)"]:::leaf
    ER --> PF
    ER --> EPS["Pension Scheme (EPS) gets 8.33 percent"]:::leaf
    ER --> EDLI["small share to EDLI (life cover)"]:::leaf
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Case Laws

Regional Provident Fund Commissioner v Vivekananda Vidyamandir (2019) — allowances ordinarily, necessarily and uniformly paid to all employees form part of “basic wages” for PF contribution.
Bridge & Roof Co. v Union of India (1963) — laid down the test for what is included in and excluded from “basic wages”.

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