Taxability of Provident Fund
Employees’ provident fund
Provident fund scheme is as a retirement benefit scheme. Under this scheme, a stipulated sum is deducted from the salary of the employee as his contribution towards this fund. The employer also generally contributes simultaneously an equal amount out of its pocket to the fund.
The contributions of employee and employer are invested in gilt-edged securities. Interest earned thereon is also credited to the provident fund account of employees. Thus, the credit balance in the provident fund account of an employee consists of employee’s contribution, interest on employee’s contribution, employer’s contribution and interest on employer’s contribution. The accumulated sum is paid to the employee at the time of his retirement or resignation.
In the case of death of an employee, the accumulated balance is paid to his legal heirs. Since the scheme encourages personal saving at micro level and generates funds for investment at macro level, Government provides deduction under section 80C.
Types of provident funds
- Statutory provident fund.
- Recognised provident fund.
- Unrecognised provident fund.
- Public provident fund
STATUTORY PROVIDENT FUND – Statutory provident fund is set up under the provisions of the Provident Funds Act, 1925.This fund is maintained by the Government and semi-Government organisations, local authorities, railway, universities and recognised educational institutions.
RECOGNISED PROVIDENT FUND – A provident fund scheme to which the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as PF Act,1952) applies is recognised provident fund.
As per PF Act,1952 any establishment employees 20 or more person is covered by the PF Act,1952(establishment employing less than 20 persons can also join the provident fund scheme if the employees want to do so). A establishment covered by the Pf Act, 1952 has the following two alternatives
|Alternative available schemes||Additional formalities to get approval of the Provident Fund Commissioner||Status for income-tax purpose|
|1.Scheme of the Government set up under the PF Act,1952||No||Such provident fund is recognised provident fund|
|2.Own scheme of provident fund||A trust has to be created by the employer and employees to start own provident fund scheme.Funds shall be invested in accordance with the rules given under PF Act,1952. If the scheme satisfies certain rules given under PF Act,1952. It will get the approval of the PF Commissioner||It is the recognised by the Commissioner of Income-tax in accordance with the rules contained under Part A of the Fourth Schedule to the Income-tax Act, it becomes recognised provident fund|
UNRECOGNISED PROVIDENT FUND – If a provident fund is not recognised by the Commissioner of Income-tax, it is known as unrecognised provident fund.
PUBLIC PROVIDENT FUND – The Central Government has established the public provident fund for the benefit of general public to mobilise personal savings. Any members of the public (whether a salaried employee or a self-employed person) can participate in the fund by opening provident fund account at any branch of the State Bank of India or its subsidiaries or a few nationalised banks.
A salaried employee can simultaneously become a member of employees ‘provident fund(whether statutory recognised or unrecognised) and the public provident fund. Any amount (subject to minimum of Rs. 500/- and maximum of Rs. 1,50,000/- per annum) may be deposited in this account. The accumulated sum is repayable after 15 years (it may be extended). This provident fund, at present, carries compound interest (tax-free) at the rate of 8.7% per annum.Interest is credited every year but is payable only at the time of maturity.
|Statutory provident fund||Recognised provident fund||Unrecognised provident fund||Public provident fund|
|Employer’s contribution to provident fund||Not treated as “income”of the year in which contribution is made||Not treated as “income”up to 12 %of salary. Excess of employer’s contribution over 12%of salary is taxable Available||Not treated as “income” of the year in which contribution is made||Employer does not contribute|
|Deduction under section 80C on employee’s contribution||Available
|Interest credited to provident fund
|Not treated as income of the year in which interest is credited||Not treated as “income” If the rate of interest does not exceed the notified rate of interest (i.e.,9.5%) of excess of interest over the notified rate is however,taxable||Not treated as income of the year in which interest is credited
|Exempt from tax
|Lump sum payment at the time of the retirement of service||Exempt from tax||Exempt from tax in some cases. When not exempt provident fund will be treated as an unrecognised fund from the beginning||See note 3||Exempt from tax|
- Accumulated balance payable to an employee participating in a recognized provident fund shall be exempt in the hands of employee in the following situations-
- If the employee has rendered continue service with his employer for a period of 5 years or more.
- If the employer has been terminated because of the certain reason which are beyond his control (e.g., ill health of the employee, discontinuation of business by employer, completion of project for which the employee was employed, etc.).
- If the employer has resigned before completion of 5 years but he joins another employer (who maintains recognized provident fund and provident fund money with the current employer is transferred to the new employer).
- Lump sum payment received from unrecognized provident fund at the time of retirement/termination shall be taxable as follows-
- Payment received in respect of employer’s contribution and interest thereon is taxable under the head “Salaries”
- Payment received in respect of interest on employee’s contribution is taxable under the head ”Income from other sources”.
- Payment received in respect of employee’s contribution is not chargeable to tax.
- If the accumulated balance becomes taxable due to non-fulfillment of the aforesaid conditions, the total income of the employee will be recomputed by the Assessing Officer, as if the fund was not recognised from the beginning.
- Interest credited to recognised provident fund is exempt from tax.