[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