Contribution to employee’s provident fund and its taxability

As per the Employees’ Provident Fund & Miscellaneous Provisions Act,1952 , the employer and employee compulsorily need to contribute to the provident fund account at the rate of 12% of the basic wages, dearness allowance and retaining allowance, subject to a maximum of Rs.6500/- per month. The rate of contribution is 10% for some specified establishments. However, they can voluntary contribute at the higher rate at the joint request made by them. There are many provident funds in which the contribution can be made. The taxability of the same is depends upon the type of provident fund in which the contribution is made. Employee’s own contribution is always exempt from tax in all cases.

Statutory provident fund- This fund is maintained by Government and Semi-Government organizations, local authorities, railways, universities and recognized educational institutions. As per the Income Tax Act, 1961 (“the act”), contribution to statutory provident fund is always exempt from tax. Contribution made by employer and interest credited is exempt. Deduction for employee’s own contribution is available u/s 80C of the act. Payment received at the time of retirement or termination of service is also exempt from tax.
Recognized Provident Fund- The provident fund is applicable to an organization with strength of 20 or more employees. Employer contribution is exempt upto 12% of the salary and interest upto 9.5% shall be exempt from tax. Contribution & interest in excess of the said limit is taxable under the head salary. Employee can also claim deduction for his own contribution u/s 80C of the act. Amount received at the time of retirement or termination of the service is taxable except in following circumstances-

• the employee should have rendered continuous service with his employer for 5 years or more; or
• if not so, he should have been terminated due to ill health, due to discontinuation of employer’s business or by reason beyond his control.
• if he has found another employment, the balance due to him should have been transferred to his account in the recognised provident fund of the new employer.

Unrecognized provident fund-
Unrecognized provident fund is the provident fund which is neither a statutory provident fund nor a recognized fund. Employer’s contribution is not taxable and interest credited is also exempt from tax but deduction u/s 80C is not available for employee’s own contribution in the fund. On retirement or termination, payment received in respect of his own contribution is exempt and interest on his own contribution is taxable under the head “income from other sources”. Payment received towards the employer’s contribution and interest thereon is taxable under the head “salaries”.
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