What is a Provident Fund?
A provident fund is a long-term savings instrument which enjoys tax benefits and is exempt from capital gains. Persons who deposit in provident funds are known as "members". Every member who makes deposits in a provident fund has a separate account which records his deposits into the account, withdrawals from it, the yield on his investment in the provident fund and the management fees charged to his account. The money in the provident fund is invested in accordance with the legislative arrangement and the fund's regulations. The yield is divided among the provident fund members pro rata to their share in the fund's assets.
There are two principal types of provident funds:
Provident Fund for Salaried Workers - a provident fund in which a salaried worker and his employer deposit in parallel in the same fund. The employer has the right to deposit in the provident fund up to 7.5% of the employee's salary (the employer's share) for provident fund payments, and the employee has the right to deposit in the provident fund up to 7% of his salary for provident fund payments, as provided in the law. The employee is entitled to tax credit with respect to his deposits in the provident fund according to specified ceilings and the employer's deposits are recognized as an expense for tax purposes. Additionally, the component of provision for severance pay at the employer's expense may be added at the rate of 8.33% of the employee's salary.
Provident Fund for Independent Operators - a provident fund for members who are not salaried workers or, alternatively, a salaried worker who makes his own deposits (other than via the employer) in the provident fund. The member enjoys a deduction from tax and a tax credit in accordance with specified ceilings.
Who Decides Where the Provident Fund will be Managed?
Under the law, the members have absolute freedom of choice as to where the money in the provident fund will be deposited and managed. This decision does not depend on the employer or on any other entity.
This change obligates the members to exercise great discretion when choosing the entity who will manage their pension savings money.
