Provident Fund (PF) is a savings scheme and it is quite popular in Bangladesh. It provides employees with financial security upon retirement. The regulatory bodies for provident funds are the Bangladesh Provident Fund Act of 1925 and the Labour Act of 2006. The Contributory Provident Funds (CPF) are also included, which cater to employees in the private sector and General Provident Funds (GPF) for government staff.
To avail of this, the employee and the business pay a portion of the base wage, which grows through compound interest.
PF income is now taxed at 15%, while donations are generally tax-exempt. It is critical to grasp the distinction between provident fund and gratuity, where the gratuity is an exceptional, one-time award for extended service.
In order to properly manage PFs, employees should be aware of tax restrictions, prevent early withdrawals, and make precise contributions to optimize their financial assets and security for retirement.
What Is a Provident Fund?
A Provident Fund (PF) is a retirement savings system that provides employees with financial stability in Bangladesh. It requires payments from employees along with, in certain situations, patrons.
The General Provident Fund (GPF) caters to employees of the government. In this case, solely the employee pays, and the cumulative savings, together with interest, are distributed during retirement. On the contrary, the Contributory Provident Fund (CPF) is widely within commercial enterprises, where both employers and employees pay.
In Bangladesh, interest rates on provident funds are different depending on whether it is the General Provident Fund (GPF) or the Contributory Provident Fund (CPF). In the past, the government has offered a maximum limit of 13% interest on GPF accounts. On the contrary, from recent studies, it is seen that the GPF interest for the first quarter of 2025 is 7.1%. Each organization can select its CPF interest rates, where it is aligned with the government regulations and limits. Interest is compounded annually, helping employees build a substantial retirement fund. During retirement planning, provident funds are a crucial part since they provide financial security.
What Are the Provident Fund Rules in Bangladesh?
The Provident Fund (PF) system assists in providing savings for the future and post-retirement benefits. While not required for all private enterprises, when adopted, it is strictly governed by national labour regulations. Here are the main guidelines and requirements to follow while maintaining a Provident Fund.
Legislative Framework:
- The Bangladesh Labour Act of 2006 requires the establishment of a separate trust.
- For government and semi-government entities, the Provident Fund Act of 1925 applies.
Eligibility Criteria:
- Employees typically become eligible after 5 years of employment, unless stated by business policy.
Contribution Structure:
- A minimum of 10% of the base pay is withheld from the worker’s monthly remuneration.
- The company matches the employee’s contribution, which is 10%
- Organizations may opt to give more than the required amount.
Tax Advantages and Limitations:
- Contributions and interest collected are tax-free if the fund is acknowledged by the National Board of Revenue (NBR)
- Premature withdrawal (before the prescribed retirement/resignation criteria) may result in tax consequences for both earned interest and deposits.
Withdrawal Conditions:
- Employees may withdraw the whole sum upon retiring, resignation, or termination, subject to corporate policy and fund guidelines.
- Withdrawal is taxed if it is made before completing the mandatory service time.
Investment Administration:
- The fund is supervised by a Board of Trustees made up of corporate and employee representatives.
- All PF assets are to be kept separate from the company’s operating finances.
Acknowledgement and Conformity:
- To be eligible for tax advantages, the PF trust must be registered with the NBR
Regular audits and reporting are required to ensure transparency and compliance. - Regular audits and reporting are required to ensure transparency and compliance.
How Is the Provident Fund Calculated in Bangladesh?
In Bangladesh, provident funds are calculated following a preset percentage-based formula, with the employee and employer dedicating 10% of their base salary. The conventional payment is 10% of their basic salary. However, some businesses may set a percentage greater than this. The total sum increases as time passes with compound interest. The interest is charged on a yearly basis.
For instance, if the base income of an employee is BDT 40,000 and both the firm and the worker pay 10%, the monthly contribution will be BDT 8000. (BDT 4000 + BDT 4000). Therefore, in 15 years, without interest, the total PF savings would be:
BDT 8000 x 12 months x years = BDT 1,440,000
Including the collective interest, the final amount is to be higher, further guaranteeing monetary security.
What Are the Common Mistakes in Provident Fund Calculation?
The meticulous calculation of the provident fund guarantees the receipt for essential benefits for the employees. However, errors can occur during the calculation. These inaccuracies may result in inconsistencies during the final compensation, compromising the financial security of the employee. Some common flaws include:
- Incorrect Compensation Basis: Some people compute contributions using gross compensation rather than basic salary.
- Miscalculating Employer Contribution: The employer could pay a lesser proportion than necessary.
- Ignoring Interest Compounding: Failure to adjust for yearly compound interest lowers the predicted end sum.
- Early Withdrawals Without Tax Considerations: Early withdrawals can end up in unanticipated deductions from taxes.
- Noncompliance With Company Policy: Regulations differ amongst firms, and misunderstanding may give rise to fund calculation problems.
What Is the Tax Rate on the Provident Fund in Bangladesh?
In recent years, Bangladesh has substantially modified the taxation of Provident Funds (PF). Income earned from provident funds and other retirement savings schemes held by corporations for staff is taxed at 15% starting in the fiscal year 2024-2025. To decrease the financial impact on the funds in question, this rate was lowered from 27.5%
The Provident Funds Act of 1925 is the lawful base for provident funds. This law describes its establishment and functioning. Additionally, the Bangladesh Labor Act of 2006 and the Labour Rules of 2015 established standards for employer obligations and employee eligibility.
How Is Provident Fund Taxation Calculated in Bangladesh?
In Bangladesh, provident funds are taxed largely on the revenue generated by their investments, not on the funds they contribute themselves. This revenue comprises interest, capital gains, and dividends generated by the fund. According to the existing laws, this revenue is subjected to tax at a standard rate of 15%.
It is vital to highlight that the tax is imposed on the fund’s gains rather than on contributions or withdrawals from individuals. Investment managers and employers are the ones who need to ensure that these tax obligations are fulfilled, especially error-free tax computation and prompt settlement of relevant taxes.
How Does Provident Fund Differ From Gratuity?
Gratuities and provident funds are monetary rewards which provide workers security after retirement. However, their structures, qualifying criteria and calculation methods differ.
Provident fund is a long-term savings plan. Here, the employee and employer contribute a certain percentage of the worker’s monthly pay base. The cumulative sum, plus interest, gets paid out when the worker retires, resigns, or fulfills other withdrawal requirements. Provident fund calculation is based on the percentage contributing from an employee’s basic salary.
In contrast, a gratuity is a once-only cash incentive provided by an employer to an employee as a sign of gratitude for their years of service. It is often provided upon retirement, resignation (following minimum service criteria) or in the case of disability or death. In Bangladesh, gratuity calls for an employee to complete at least five years of continuous service before being eligible. It is solely paid by the company, unlike provident funds. Gratuity calculation in Bangladesh is based on the last drawn basic salary of an employee.
Final Thoughts
For both public and private sectors, Provident Funds (PF) are critical financial security mechanisms. It lays the groundwork for reliable retirement planning. Understanding contribution patterns, tax consequences, and computation procedures is necessary for effective management of funds. Along with preventing early withdrawals that might jeopardize long-term financial stability is also crucial. Employers, while carrying out their duties, legal compliance, prompt payment, and safe investment decisions; can also ensure a step towards their financial independence upon retirement. This results in a mutually beneficial arrangement that promotes financial health and workplace harmony.
