Provident Fund & Its Taxability

Provident Fund provides a compulsory contribution for the future of an employee after his retirement or for his dependents in case of his early death. In such fund employee and employer contribute equally. It is compulsory for any organization in which more than 20 employee working to contribute in Provident fund

Types of Provident Funds:

Statutory Provident Fund – Statutory Provident Fund is set up under the provisions of the Provident Fund Act; 1925.This fund is maintained by Government and Semi-Government organizations, local authorities, railways and other institutions

Recognized Provident Fund – Recognized Provident Fund is one which is recognized by the Commissioner of Income tax in accordance with the rules contained therein the Act. An organization can also voluntarily opt for this scheme. This fund is maintained by private sector organizations. All RPF schemes must be approved by The Commissioner of Income Tax. Here the company can either opt for 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 specified manner. The income of the trust shall also be exempt from income taxes.

Unrecognized Provident Fund – Unrecognized Provident Fund is that provident fund that is started by employer and employees in an establishment and which is not recognized by the Commissioner of Income tax in accordance with the rules contained therein the Act. Since they are not recognized, URPF schemes have a different tax treatment as compared to RPFs.

Public Provident Fund – The Central Government has established the Public Provident Fund i.e. a scheme under Public Provident Fund Act 1968 for the benefit of general public to mobilize personal savings. A salaried employee can simultaneously become a member of employees’ provident fund and the public provident fund. In this scheme even self-employed persons can make a contribution. The minimum contribution is Rs.500 per annum and the maximum contribution is Rs.70,000 per annum. The contribution made along with interest earned is repayable after 15 years, unless extended. The rate of interest is statutorily set at 8% per annum.

What is Tax Treatment of Different Provident Fund?

Statutory Provident Fund Recognized Provident Fund Unrecognized Provident Fund Public Provident Fund
1 2 3 4 5
Employer’s contribution to provident fund Exempt from tax Exempt up to 12% of salary – excess is taxable Exempt from tax Employer does not contribute
Deduction under Section 80C Available Available Not available Available
Interest credited to provident fund Exempt Exempt up to notified rate (now 8.5%) Exempt Exempt
Lump-sum payment at retirement Exempt Exempt in some cases Employee contribution is exempt Exempt

From assessment year 2006-07, section 80C provides for an outright deduction on certain contributions/payments subject to three basic conditions: (i) The contributions/payments must have been made during the relevant previous year; (ii) The aggregate amount qualifying for deduction should not exceed Rs.1 Lakh;  (iii) The sum paid or deposited need not be out of income chargeable to tax but deduction should not exceed income which is chargeable to income tax.

This has reference to Section 80C of Income Tax Act.

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