Provident Funds - Meaning, Types and Taxability

[Meaning of Provident Funds, Types of Provident Fund, Taxability of Provident Funds, SPF, RPF, URPF, PPF, Transferred Balance]

What is provident fund? Explain the various types of Provident fund with their respective treatment as per Income Tax Act, 1961.

Meaning of Provident fund in Income Tax

Provident fund scheme is a welfare scheme for the benefit of the employees. Under this scheme, a certain sum is deducted by the employer from the employees’ salary as his contribution to the provident fund every month. The employer also contributes a certain percentage of the salary of the employee to the provident fund. These contributions are deposited. The interest earned on these investments is also credited to the provident fund account of the employees. The balance thus keeps accumulating year after year. The fund so accumulated is called provident fund. At the time of retirement, the accumulated amount is given to the employee.

Types of Provident Fund

At present there are 4 types of provident funds:

a) Statutory Provident Fund (SPF): 

This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.

b) Recognized Provident Fund (RPF): 

This scheme is applicable to an organization which employs 20 or more employees. An organization can also voluntarily opt for this scheme. All RPF schemes must be approved by The Commissioner of Income Tax. Here the company can either opt for a government-approved scheme or the employer and employees can together start a PF scheme by forming a Trust. The Trust so created shall invest funds in a specified manner. The income of the trust shall also be exempt from income taxes.

c) Unrecognized Provident Fund (URPF): 

Such schemes are those that are started by employer and employees in an establishment, but are not approved by The Commissioner of Income Tax. Since they are not recognized, URPF schemes have a different tax treatment as compared to RPFs.

d) Public Provident Fund (PPF): 

This is a scheme under the Public Provident Fund Act 1968. In this scheme, even self-employed persons can contribute. The minimum contribution is Rs.500 per annum and the maximum contribution is Rs.1, 00,000 per annum. The contribution made along with interest earned is repayable after 15 years unless extended.

Taxability of Provident Funds

Particulars

SPF

RPF

URPF

PPF

1. Employee's/ assessee's contribution

Deduction u/s 80C is available from gross total income subject to the limit specified therein

Deduction u/s 80C is available from gross total income subject to the limit specified therein

No deduction u/s 80C is available

Deduction u/s 80C is available from gross total income subject to the limit specified therein

2.Employer's contribution

Fully exempt from tax

Exempt up to 12% of salary. Amount in excess of 12% is included in gross salary.

Not exempt but also not taxable every year. For taxability see point 4 below

Not applicable as there is only assessee's own contribution

3. Interest on Provident Fund

Fully exempt from tax

Exempt u/s 10 up to 9.5% p.a. Interest credited in excess of 9.5% p.a. is included in gross salary

Not exempt but also not taxable every year. For taxability see point 4 below

Fully exempt

4.Repayment of lump-sum amount on retirement / resignation /termination

Fully exempt u/s 10(11)

Exempt if the employee has rendered a minimum of 5 years of continuous service

Accumulated employee's contribution is not taxable Accumulated employer's contribution + interest on employer's contribution (till date) is taxable as profit in lieu of salary. Interest on employees contribution (till date) is taxable as income from other sources

Fully exempt. u/s 10(11)

Transferred Balance of Provident Fund: 

The balance of unrecognised fund which is transferred to recognised fund is called transferred balance. Points to remember in this case:

Ø  The fund will be treated as RPF from the date fund was instituted

Ø  The employer’s contribution to URPF shall qualify for exemption up to 12% of salary and excess shall be taxable.

Ø  Interest up to 9.5% is exempted, excess taxable

Ø  Salary means: basic + DP + DA (Which enters) + Commission on turnover

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