Provident Fund – Types and Taxability under Income Tax

Introduction:

Provident fund scheme is a scheme intended to give extensive benefits to an employee at the time of his retirement. Under this scheme, a specified sum is deducted from the salary of every employee as his contribution towards the fund. The employer generally contributes the same amount out of his pocket, to the fund. The share of the employer and the employee are invested in approved securities. Interest earned on those securities is also credited to the account of the employee. Thus, the credit balance in a provident fund account    of an employee consists of the following:

1. Employee Contribution
2. Interest on Employee’s Contribution
3. Employer Contribution
4. Interest on the Employer’s Contribution

The accrued balance is paid to the employee at the time of his retirement or resignation. In the case of the death of the employee, the same is paid to the legal heirs.

Types of Provident Funds

1. Recognized Provident Fund (RPF)
2. Unrecognized Provident Fund (URPF)
3. Statutory Provident Fund (SPF)
4. Public Provident Fund (PPF)

1. Recognized Provident Fund: It means a fund recognized by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952. It governed by Part A of Schedule IV to the Income Tax Act, 1961. This schedule contains various rules regarding the following.
   1. Recognition of the fund.
   2. Employee and employer’s contribution to the fund.
   3. Treatment of accumulated balance etc.
2. Unrecognized Provident Fund: It means a fund recognized by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952.
3. Statutory Provident Fund: A SPF is governed by the EPF and Miscellaneous Provision Act, 1952. It applies to employees of Government, railways, semi-government institutions, local bodies, universities, and all recognized educational institutions.
4. Public Provident Fund: Public Provident Fund (PPF) under the Public Provident Fund Act, 1968 is another system of contributing to the provident fund. Some key points of this act are as follows-
   1. A membership to this fund is open to every individual.
   2. Self-employed and salaried employees both may contribute to this.
   3. A minimum contributing limit of Rs. 500 per annum.
   4. An Individual may contribute to the fund on his own behalf as also on behalf of a minor of whom he is a guardian.
   5. The exemption limit under section 80C of the Income Tax Act, 1961 is 1,50,000.

Tax treatment of Provident Fund

1. During the employment period

Note: Salary = Basic Salary+ Dearness Allowance (if provided in the terms of employment of retirement benefits) + Commission as a percentage of turnover.

2. At the time of retirement
   • RPF/PPF/SPF – The payment received by an assessee from the following funds at the time of retirement or otherwise, would be fully exempt from tax u/s 10(11) and 10(12):

Condition for Exemption:

• • • The employment term should be at least 5 years. (Continuous)
    • If the service period is less than 5 years, the reason for termination is the discontinuance of the employer’s business or ill health; or any other cause beyond the control of the employee.
    • The balance in RPF is transferred to RPF with the new employer on re-employment or his individual account.
    • The balance in RPF is transferred to the NPS account referred to in section 80CCD and notified by the government.

• • Unrecognized Provident Fund – Amount received on maturity of URPF is treated as follows –
    • Employee’s contribution is not taxable
    • Interest in employee’s contribution is taxable under the “Income from Other Sources”.
    • Employer’s contribution and interest are taxable as salary.