• Jan
  • 19
  • 2012

Employee’s Provident Fund Act, 1952 vis-á-vis Income Tax Act 1961- Tax Treatment of PF Dues

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Employer’s contribution and Employees’ contribution in India are governed by EPF Act, 1952. The employees’ contributions are obtained by employer @12% and along with equal contribution are deposited with the PF trust or PF commissioner at the designated bank account by the latter.

The Indian Income tax Act, 1961, has created a fiction by adding section 43B and sections 36 (1) (va), whereby it has intended to disallow employer’s contribution as expenditure or add to income employees’ contribution u/s 2(24)(x) in the hands of the employer as businessman.

In this paper, the authors have endeavored to bring out clearly the clauses of both the Acts and relevant notifications in this regard.

The views expressed in this paper are based on current legal provisions and enactments. The readers are advised to take proper professional care before relying on the information contained in this paper.

Paper index:

1: EPF & MP ACT, 1952 in brief.

2: Applicability of this scheme.

3: Whether Voluntary Coverage under this scheme is allowed.

4: The contributory rate for employers and employees towards PF and other funds and its calculations.

5: Whether the above ceiling limit is fixed or flexible?

6: The Government accounts in which the PF dues are required to be deposited.

7: Interest rate as applicable to PF Account.

8: “Due date” under EPF Act, 1952 for the deposit of the contribution.

9: Grace period allowed for deposit of EPF dues by the employer and the relevant circular in this behalf and The ICAI views on the same.

10: Income Tax treatment of PF dues in the hands of the employer.

11: Illustration on EPF contribution and their tax treatment.

12: Whether PF fund established under section 17(1) of the EPF ACT, 1952 by the employer should be recognized by the CIT (IT) before any exemption is granted to it u/s 2(38) of the Income Tax Act, 1961?

13: Tax treatment of P.F contribution in the hands of the employees.

14: Types of PF trusts as per the EPF&MS Act, 1952.


1: EPF & MP ACT, 1952 in brief.

The Employees’ Provident Fund was created by an Act of Parliament in 1952 for providing the retirement benefits to the workers engaged in non-government sector.  The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Schemes framed thereunder have been instituted as self-applying and the employers of the establishments are responsible to report compliance suo-moto.  The three schemes framed are given below:

 1.    Employees’ Provident Funds Scheme, 1952

2.    Employees’ Deposit-Linked Insurance Scheme, 1976 (EDLI) and

3.    Employees’ Pension Scheme, 1995  (EPS) (Earlier the Employees’ Family Pension Scheme, 1971)

The Employees Provident Funds Scheme, 1952 was introduced in November 1952 to provide post retirement financial support to the workers employed in Industrial & Commercial Sector establishments.  The scheme provided for provident fund system on contributory basis by the Employers and the Employees at equal rate.  It made available to the employee concerned the accretions in the Provident Fund a/c with interest in lump sum on retirement or leaving the job.

2: Applicability of this scheme.

This scheme applies to:

  • Establishments employing 20 or more persons and engaged in any of the 180 industries / Classes of Businesses specified.
  • Co-operative Societies, employing 50 or more persons & working without the aid of power.
  • Establishments not coverable statutorily can come under the coverage of the Act statutorily.
  • An establishment continues to be covered under the Act, irrespective of the fall in the employment strength.
  • Since the Act applies on its own force to the establishments, the employers are required to file the particulars in the specified format for registration and allotment of business number.

As per Para 26(2) of the Employees’ Provident Fund Scheme, 1952,

  • every employee employed in or in connection with the work of a factory or establishment
  • other than an excluded employee
  • shall entitled and required to become a member of the Fund from the date of joining the factory or establishment

The term employee includes the following persons also:

Employee” as defined in Section 2(f) of the Act means any person

  • who is employee for wages in any kind of work manual or otherwise, in or in connection with the work of an establishment and who gets wages directly or indirectly from the employer and
  • includes any person employed by or through a contractor in or in connection with the work of the establishment

Thus the term “employee” includes:

(1)  Employed by or through the contractor in or in connection with the work of the establishment

(2)  Engaged as an apprentice, not being an apprentice under the Apprentices Act, 1961

Who is an Excluded Employee?

An employee of the Company to whom both the following two conditions apply at the time of joining the services of the Company

a)    His/Her Pay is more than Rs. 6500/- per month (w.e.f 1.6.2001)

b)    Does not have any current PF/EPS Balance under EPF & MP Act, 1952

as defined under pare 2(f) of the Employees’ Provident Fund Scheme means an employee who having been a member of the fund has withdraw the full amount of accumulation in the fund on retirement from service after attaining the age of 55 years;

Meaning of Pay:

‘Pay’ includes basic wages with dearness allowance, retaining allowance, (if any) and cash value of food concessions admissible thereon and leave encashment.

CLARIFICATION ON LEAVE ENCASHMENT EFFECTIVE

DATE OF IMPLEMENTATION

Based on the representations received from Employers’ Association expressing difficulties in implementing the date for enforcement of PF Contribution on leave encashment paid on or after 01.10.1994 till 30.04.1995, the matter has been referred to the Central Board of Trustees for deciding the date of enforcement of PF Contribution on leave encashment. Till such time a decision is taken, the effective Date from which the recovery of PF contribution on leave encashment shall be from 01 May 2005 onwards.

(Auth: Govt of India, Min. of Labour, Employees Provident Fund Organisation, New Delhi letter No.Coord./3(4)2002/clarifications/50673 dated 09 September 2005)

3: Whether Voluntary Coverage under this scheme is allowed.

The establishment is allowed the coverage under the provisions of the Act on voluntary basis with the consent of majority of the employees.

4: The contributory rate for employers and employees towards PF and other funds and its calculations.

A4: As per amendment-dated 22.9.1997 in the Act, both the employees and employer contribute to the fund at the rate of 12% of the basic wages, dearness allowance and retaining allowance, if any, payable to employees per month. The rate of contribution is 10% in the case of following establishments:

  • Any covered establishment with less then 20 employees, for establishments cover prior to 22.9.97.
  • Any sick industrial company as defined in clause (O) of Sub-Section (1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 and which has been declared as such by the Board for Industrial and Financial Reconstruction,
  • Any establishment which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and
  • Any establishment engaged in manufacturing of  (a) jute  (b) Breed  (d) coir  and  (e)  Guar gum Industries/ Factories. The contribution under the Employees’ Provident Fund Scheme by the employee and employer will be as under with effect from 22.9.1997.

12% of the Pay

*   “Pay” includes basic wages# with dearness allowance, retaining allowance** (if any), and cash value of food concession and leave encashment.

# Basic Wages means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-

  • the cash value of any food concession;
  • any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, over-time allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
  • Any presents made by the employer

** Retaining allowance means allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his service

NOTE: The employer cannot reduce the PAY.

Q5: Whether the ceiling limit is fixed or flexible?

A5: AS far as the employee is concerned the PF contributions are calculated as follows:

STATUS of EMPLOYEES’ CONTRIBUTION:

Contribution Minimum Maximum
Towards PF 12% of the pay 100% of the pay

STATUS of EMPLOYER’S CONTRIBUTION:

Contribution Maximum Minimum
Towards PF 12% of the pay 12% of the pay

 Further the employer’s contribution should be divided as follows:

Pension Fund (EPS)- 8.33% of Pensionable Salary

Pensionable Salary: Pay or Rs. 6500/- whichever is less

Provident Fund    – 12% of the Pay minus EPS

6: The Government accounts in which the PF dues are required to be deposited.

A6: The PF dues are required to be deposited as follows:

(1) 12% of the Pay, Employees Provident Fund Contribution – A/c No. – 1

(2)  Voluntary Provident Fund Contribution – A/c No. – 1

(3)  12% of the Pay minus EPS, Employer Provident Fund, – A/c No. – 1

(4)  8.33% of the Pensionable Salary (EPS)-A/c No. – 10

(5)  1.10% of the Pay, PF Admn. Charges-Minimum Rs. 5/-pm, A/c No. – 2

(6)  0.50% of Pensionable Salary for EDLI contribution-A/c No. – 21

(7)  0.01% of Pensionable Salary for EDLI administrative charges – Minimum Rs. 2/-pm., A/c No.–22

Cheque in Fvg. of – State Bank of India – EPF A/c

 7: Interest rate as applicable to EPF Account

A7: The EPF interest rates for various periods are noted below:

(1) 12% Upto 30-06-2000

(2) 11% from 1-7-2000 to 31-03-2001

(3) 9.5% from 01-04-2001 to 31-03-2005

(4) 8.50 % from 01-04-2005 onwards

(5) 9.5% FY 10-11

(6) 8.25% FY 11-12

# Interest is calculated on the monthly running balance of the member

# Interest on provident fund accumulations exempt from income tax

8: Due date” under EPF Act, 1952 for the deposit of the contribution.

The clause 38(1) of the EPF scheme reads as follows:

“The employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee’s contribution from his wages which together with his own contribution as well as an administrative charge of such percentage [of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employee and in respect of which provident fund contributions are payable, as the Central Government may fix],

  • He shall within fifteen days of the close of every month pay the same to the Fund by separate Bank drafts or cheques on account of contributions and administrative charge.”

Now the moot point is which “month”.

  • Whether the month to which salary relates or
  •  The month in which salary is received by the employee and contribution obtained by the employer assessee.

In the below mentioned cases it was resolved that 15 days from the close of month should be reckoned from the close of month in which employees contribution are recovered by the employer that i.e. the month of payment of wages.

The same has been held in:-

(a) Fluid Air (India) Ltd. vs. D.C.I.T. (1997) 63 ITD 182 (Mumbai)

And

(b) Madras Radiators & Pressings Ltd. vs. D.C.I.T. (1996) 59 ITD 515 (Mad.)/ (1996) 56 TTJ (Mad.) 662

Illustrations on the above point:

Month of salary Month of payment of salary Payment due date
April 2008 May 2008 June 15th 2008 + 5 grace days
May 2008 June 2008 July 15th 2008 + 5 grace days
June 2008 July 2008 Aug 15th 2008 + 5 grace days
July 2008 Aug 2008 Sep15th 2008 + 5 grace days
Aug 2008 Sep 2008 Oct 15th 2008 + 5 grace days
Sep 2008 Oct 2008 Nov 15th 2008 + 5 grace days
Oct 2008 Nov 208 Dec 15th 2008 + 5 grace days
Nov 2008 Dec 2008 Jan 15th 2009 + 5 grace days
Dec 2008 Jan 2009 Feb 15th 2009 + 5 grace days
Jan 2009 Feb 2009 Mar 15th 2009 + 5 grace days
Feb 2009 Mar 2009 April 15th 2009 + 5 grace days
Mar 2009 April 2009 May 15th 2009 + 5 grace days

 9: Grace period allowed for deposit of EPF dues by the employer and the relevant circular in this behalf and The ICAI views on the same

A9:  Five days of grace period has been allowed to employers for payment of Provident Fund contributions. This grace period is additionally provided by the following circulars of the CPFC:

  • clause (iii) of CPFC’S Circular No.E.128 (1) 60-III dated 19-3-1964 as modified by circular No.E11/128 (section 14-B Amendment)/73 dated 24-10-1973.

Also The ICAI has in its publication “ISSUES on TAX Audit 2003 revised” given in clause 16(b) the following views on EPF contribution collected by the employer from his employees:

16. (on tax audit report)

(b) Any sum received from employees towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x); and due date for payment and the actual date of  payment to the concerned authorities under section 36(1)(va).

Clause (b) (pg 79)

(iii) Kindly clarify whether it is mandatory to mention the cases where employers have not deducted/collected P.F. etc. from the employees.

Ans. There is no specific requirement in sub-clause (b) to mention the cases where employers have not deducted/collected provident fund etc. from their employees. The objective of the above sub clause is to see whether the sum so recovered from employees has been treated as income under section 2 (24)(x).

(iv) Where the provident fund contributions are not remitted within the due date but remitted within the financial year after due date. Please clarify (a) whether it is to be reported for employee’s contribution?

(b) Whether it is an allowable expenditure?

Ans. Paragraph 27.4 clearly says that section 36(i)(va) of the Act permits deduction of such sum if it is credited by the assessee to the account of the employees in the relevant statutory fund on or  before the due date, i.e., the date by which it is required to be credited as per the provisions of the applicable law etc. It may be noted that Employees’ P.F Act provides for 5 days of grace period for payment of contribution. This can be taken into consideration for determining the due date of payment.

(Pg 80)

(v) In the month of April 1999, the State of Delhi declared an increase in wages w.e.f. 1st February, 1999. In such case what will be the due date for payment of PF, ESI as per section 36(1)(va)?

Ans. Since the wage increase has been declared by the State Government only in the month of April, 1999 the appropriate recoveries of employees’ contributions towards the increased provident fund would obviously be made in the previous year 1999-2000. The provisions of section 36(1)(va) will apply accordingly.

(vi) The assessee applied for a P.F. No. in time but the same was not allotted within a reasonable time due to departmental delay. The assessee duly made a provision for the contribution by the employer in its profit and loss account and balance sheet. But the same could not be remitted to the authorities because of the non allotment of P.F. No. Please clarify the duty of the tax auditor in this regard.

Ans. The objective of sub-clause (b) is to get information in respect of sums recovered from employees towards provident fund contributions etc. and the dates on which such contributions were remitted to the statutory authorities. This information is necessary to determine the allowability of the payment of such contributions under the provisions of section 36(1)(va). In the given issue the assessee has not remitted the contribution to the statutory authorities, whatever be the reasons therefor. The tax auditor has to indicate the factual position in this regard.

(vii) Please clarify whether the grace period of 5 days should be considered while determining due date for payment of PF, ESIC contributions for reporting under section 36(1)(va) read with sections 2(24)(x) and 43-B.

Ans. The following extracts from the judgment of the Income-tax Appellate Tribunal in Hunsur Plywood Works Ltd. v. Deputy Commission of Income-tax (1995) 54 ITD 394 will make the position clear.

“Paragraph 38 of the Employees’ Provident Funds Scheme, 1952 says that the amounts under consideration in respect of wages of the employees for any particular month shall be paid within 15 days of the close of every month.

Clause (iii) of CPFC’s Circular No.E. 128(1) 60-III dated 19-3-1964 as modified by Circular No.E. 11/128 (section 14-B Amendment)/73 dated 24-10-1973 allows five days of grace period to the employers for payment of provident fund contribution, administrative charges and inspection charges. The said Circular also states that if payment be made within the said period of grace, no damages as per section 14-B of the Employees’s Provident Funds and Miscellaneous provisions Act, 1952 shall be levied.

Furthermore, our attention has also been drawn to CPFC’s Circular No. E.128 (1)60-IV dated 29-4-1967 in clause (iii) of which it has been stated that the Central Board of Trustees at its meeting on 13-4-1967 agreed that if payment was made within grace period already allowed by it, then such payments should not be counted as default even for the purpose of counting the number of defaults………… (Page 399)

Thus, we find that from strict judicial angle, the period or days of grace would seem to be falling within a twilight region. The period certainly follows the exact due date but at the same time no action by the other side is possible within the said period except for registering a protest. Since the present issue is required to be resolved from practical angle, as discussed by us above, we are required to examine the consequences of making of payment of the employees’ contribution to the EPF etc., within five days’ period of grace. We find that if an employer makes payment within such period of grace, not only is he not liable to pay any damages in accordance with the Employees’ Provident Fund Scheme and the relevant Act, but by virtue of the Circular dated 29-4-1967 as mentioned above; he will also not be treated to be in default. Hence, we ultimately hold that from practical point of view, the five days’ period of grace after 15th of the succeeding months is to be considered merely as an extension of the early 15 days and all the consequences of making payment within the said 15 days should be considered to follow if the payment be made within the grace period following the said period of 15 days.”…….. (Page 400).

Also refer to CIT v. Salem Cooperative Spinning Mills Ltd. [2002]

258 ITR 360 (Mad).

(viii) A non-corporate assessee is maintaining books of account on cash basis. It has not deposited its P.F. contributions before the end of the relevant previous year but remitted the same within the statutory due dates. Will it be allowed deduction of the same on payment basis?

Ans. If an assessee is maintaining books of account on cash basis, any remittance of P.F. contributions recovered from its employees, to the statutory authorities after the end of the relevant previous year, even if it is before the statutory due date should not be allowed as a deduction under section 36(1)(va) because as per the provisions of section 145 the income of the assessee is to be computed in accordance with the cash method of accounting.

(ix) Please clarify how a tax auditor can verify the details of payments of P.F. contributions etc. in the case of tax audit of the accounts of a sub-contractor particularly where the liability on this account is on the main employer?

Ans. Many a time in the construction industry the main contractor subcontracts portions of the main contract to various sub-contractors. Such sub-contracting may of two types. Firstly, the sub-contractor may be asked to execute the sub-contract merely as an agent while the main contractor will assume responsibility for recoveries of P.F., ESI contributions and remittance of the same to the statutory authorities. In this case the tax auditor of the subcontractor need not report under this clause because the subcontractor is not responsible either for collection or remittance of the P.F. contributions etc. There may also be cases of subcontractors who may independently execute such sub-contracts by employing labourers etc? In such a situation the employer – employee relationship exists between the sub-contractor and the workers and the responsibility for recovering P.F. contribution etc. and remitting the same to the statutory authorities wholly rests with the sub-contractor. In this case the tax auditor has to comply with the requirements of this clause.

10: Income Tax treatment of PF dues in the hands of the employer.

The income tax treatment of PF contribution can be summarized as follows:

Particulars of Contribution Paid within due date as per EPF ACT Paid after due date as per EPF ACT but before return filing date under IT ACT, 1961u/s 139(1) Tax treatment Any deduction in any other year
Employee’s contribution Yes, in view of section 36(1)(va) if payment is made by cheque it should be realized within 15 days of the due date (including 5 grace days) NA No taxability arises first treat it as income under section 2(24)(X)And then allow deduction u/s 36(1)(va) no
Employee’s contribution No NA Treated as income of the employer under section 2(24)(x) no
Employer’s contribution Yes NA Fully deductible u/s 43B(b) no
Employer’s contribution No Yes Fully deductible u/s 43B(b) w.e.f. A.Y 2004-05 no
Employer’s contribution No No Not deductible u/s 43B(b) w.e.f. A.Y 2004-05 It will be allowed as deductible in the year in which the employer has finally paid it. $

$ It is assumed that the employer is following mercantile system of accounting.

11: Illustration on EPF contribution and their tax treatment

Suppose A ltd has paid salary (pay as per EPF ACT) for the month of March 2009 as RS. 1,20,00,000.00  in April 2009. The return filing date of the company under IT Act is 30th Sep 2009. Then the due dates and amounts of contribution are as follows:

Employer’s contribution @12% Employees’ contribution @12% Due date as per EPF Act, 1952 Due date as per IT Act, 1961
14,40,000.00 14,40,000.00 20th May 2009 Sep 30th 2009

 Now different combination for employees’ and employer’s contribution is:

Particulars of contribution Amount payable Date of payment Tax treatment in the hands of the employer remarks
Employees’ 14,40,000.00 Before 20th May 2009 First add  amount payable to income u/s 2(24)(x) and then allow deduction u/s 36(1)(va) in the F.Y. 2008-09 If paid by cheque, the cheque should be cleared within 15th days of the due date i.e. 5th June 2009
Employees’ 14,40,000.00 after 20th May 2009 add amount payable to income u/s 2(24)(x) in the F.Y. 2008-09 No remarks
Employer’s 14,40,000.00 Before 20th May 2009 Amount payable is Fully allowable in the F.Y. 2008-09 If paid by cheque, the cheque should be cleared within 15th days of the due date i.e. 5th June 2009
Employer’s 14,40,000.00 after 20th May 2009 but before 30th sep 2009 (ITR due date.) Amount payable Fully allowable in the F.Y. 2008-09 If paid by cheque, the cheque should be cleared within 15th days of the due date i.e. 5th June 2009
Employer’s 14,40,000.00 after 30th sep 2009 (ITR due date.) Amount payable  is disallowed in the F.Y. 2008-09 Allowed in the year in which finally paid

 12: Whether PF fund established under section 17(1) of the EPF ACT, 1952 by the employer should be recognized by the CIT (IT) before any exemption is granted to it u/s 2(38) of the Income Tax Act, 1961?

As per circular No. 153 [F. No. 215/22/71-IT(A-II)], dated 30-11-1974 CBDT has clarified that:

In order to avail of the benefits of the Income-tax Act,

  • a provident fund has either to be recognised in accordance with the provisions of the Income-tax Act or
  • it must be established under a Scheme framed under the Employees’ Provident Fund Act, 1952.
  • The funds which are not established under the Employees’ Provident Fund Scheme, 1952, have to be expressly recognised by the Commissioner under rule 3 of Part A of the Fourth Schedule to the Income-tax Act before they can be covered by the definition in section 2(38).
  • Thus When a fund is exempted under section 17 of the Employees’ Provident Fund and Family Pension Fund Act, 1952, it is implicit that it is not established under the Employees’ Provident Fund Scheme, 1952. It has, therefore, to be recognised by the Commissioner under the relevant provisions of the Income-tax Act before it can enjoy benefits of a “recognized provident fund” under the Act

Full circular is annexed below:

SECTION 2(38) l RECOGNIZED PROVIDENT FUND

21. Provident fund exempt under section 17(1) of the Employees’ Provident Fund Act, 1952 – Whether recognition by the Commissioner necessary before it can enjoy benefits of recognised provident fund

1. Reference is invited to Board’s Circular F. No. 44/14/64-ITJ, dated 22-3-1965 [Annex] on the above subject.

2. I am directed to say that the Board has re-examined the contents of its circular referred to above. According to section 2(38), the term “recognised provident fund” means a provident fund which has been and continues to be recognised by the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule and includes a provident fund established under a scheme framed under the Employees’ Provident Fund Act, 1952. It would thus appear that in order to avail of the benefits of the Income-tax Act, a provident fund has either to be recognised in accordance with the provisions of the Income-tax Act or it must be established under a Scheme framed under the Employees’ Provident Fund Act, 1952. The funds which are not established under the Employees’ Provident Fund Scheme, 1952, have to be expressly recognised by the Commissioner under rule 3 of Part A of the Fourth Schedule to the Income-tax Act before they can be covered by the definition in section 2(38).

3. When a fund is exempted under section 17 of the Employees’ Provident Fund and Family Pension Fund Act, 1952, it is implicit that it is not established under the Employees’ Provident Fund Scheme, 1952. It has, therefore, to be recognised by the Commissioner under the relevant provisions of the Income-tax Act before it can enjoy benefits of a “recognized provident fund” under the Act.

In view thereof, Board’s Circular No. 44/14/64-ITJ, dated 22-3-1965 is withdrawn with immediate effect.

Circular : No. 153 [F. No. 215/22/71-IT(A-II)], dated 30-11-1974.

ANNEX – CIRCULAR, DATED 22-3-1965 REFERRED TO IN CLARIFICATION

According to section 2(38) recognised provident fund means a provident fund which has been and continues to be recognised by the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule and includes a provident fund established under a scheme framed under the Employees’ Provident Fund Act, 1952. A question was raised as to whether private provident funds (as distinguished from provident funds maintained by the Central Board of Trustees constituted under the provisions of the Employees’ Provident Fund Scheme) which were or are exempt under the provisions of section 17(1) of the Employees’ Provident Fund Act, 1952, and/or under Para 79 of the Employees’ Provident Fund Scheme, 1952, will be covered by the definition of recognised provident fund under section 2(38). Such funds are not established under either the Employees’ Provident Fund Act or under the Employees’ Provident Fund Scheme. As such, they do not fall within the terms of the definition under section 2(38) and cannot automatically get recognition under the Income-tax Act. In order to get the benefits of recognition, they will have to apply for recognition under Part A of the Fourth Schedule.

13: Tax treatment of P.F. contribution in the hands of the employee. The following tax treatment is done in the hands of employees/contributors:

Sl. No. Particulars Statutory PF Recognized PF Unrecognized PF Public PF
1. EmployersContributionto PF Exempt from tax Exempt Upto 12% of salary excess taxable in the hands of the employee Exempt from Tax No contribution from employer
2. Deduction u/s 80C on employees contribution Available up-to Rs. 1,00,000.00 Available up-to Rs. 1,00,000.00 Not available Available up-to Rs. 1,00,000.00
3. Interest on contribution by employer and employee Exempt from tax Exemption Upto notified amount of interest rate. 8.5% Exempt from tax Exempt from tax
4. Lumpsum payment given on retirement to the employee Exempt from tax Exempt from tax (service period should not be less than 5 years else fully taxable) a)         OwnContribution- Exemptb)  Interest    on  owncontribution  –  taxable  as

income             from other

sources

c)Employer’s contribution

and      interest             thereon-

taxable  so  included  in

gross salary

Exempt from tax

 14: Types of PF trusts are there as per EPF&MS Act, 1952.

A14: The provident funds can be classified into four following categories:

Un-exempt or statutory provident fund under EPF&MP ACT, 1952 Exempted provident fund Unrecognized Provident fund Excluded provident fund An Excluded Employees’ Trust is one, which does not come under the purview of the PF Department, but its policies are framed based on the PF Act. The regulatory Authorities are the Income Tax department
Exempted or Recognized provident fund u/s 17(1) of the EPF&MP ACT, 1952 and recognized by CIT under section 2(38) of the income tax Act, 1961 read along with rules given under PART A of Schedule IV Unrecognized provident fund which is not recognized by the CIT recognized by CIT under section 2(38) of the income tax Act, 1961 read along with rules given under PART A of Schedule IV Unrecognized provident fund which is not recognized by the CIT
Once the Company crosses the 20 employees’ mark,it is covered under the Act and has to apply to the RPFC for the Allotment of a Code Number andshould remit the PF contributions from the date of coverage After being covered under the provisions of the PF Act andif it is a profit making CompanyWith 200 employees,It may pass a Board Resolution and Apply to the IT Department for recognition of a Trust and thereafter file for exemption with the RPFC. On receipt of the approval from RPFC the Trust can comply as “Exempt No tax concessions to employees under section 80C and other sections of the Income tax Act, 1961 An “Excluded Employee” shall mean an employee of the Company to whom both of the following two conditions apply at the time of the coverage of the Company under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 or at the time of his joining the services of the Company, whichever is later.i His pay at the relevant time as above is more than Rs 6500/- per month.
ii Does not have any current PF Balance
No tax concessions to employees under section 80C and other sections of the Income tax Act, 1961
Contribution:Employer contribution of 12% of Basic, D.A, Leave Encashment and cash value
of food concession if any, out of which
  •   8.33% with a cap of Rs.6500/- to be paid towards EPS a/c.
  • EDLI @ 0.5% (on capped wages at Rs.6500/-)
  • EDLI Administration charges @ 0.01% of Basic and D.A.
  •  PF Administration charges @ 1.1% of Basic and D.A.
  •  All Voluntary Contributions.

Contribution: Out of 12% of Employer’s contribution, 8.33% (on wages capped at Rs.6500/-)
transferred to EPS A/c

  • EDLI @ 0.5% (on wages capped at Rs.6500/-)
  • EDLI Administration charges @ 0.01% of Basic and Dearness Allowance(on wages capped at 6500/-)
  • PF Inspection charges @ 0.18% of Basic and D.A.

 Trusts vs EPFO

particulars  Un-exempted establishments     Exempt Trusts  Excluded Trusts
Rate (%) Actual (Rs) Rate (%) Actual (Rs) Rate (%) Actual (Rs)
Administration charged by EPFO 1.1 55,000 Nil 0 Nil 0
Inspection Charges to EPFO Nil 0 0.18 9000 Nil 0
Fund management charges (indicative) 0.2 10,000 0.5 25,000 0.5 25,000
Total Cost 1.3 65,000 0.68 34,000 0.5 25,000
Total Cost Annualized (Rs) 7,80,000 4,08,000 3,00,000
Consider an organisation contributing Rs 50 lakh a month towards provident fund. The illustration indicates the savings potential in cost of exempted and excluded trusts, taking 0.5 per cent as fund management charges. However, for larger salary bills the fund management charges would reduce and in some cases is a fixed fee not linked to the contribution made.

  ————————————————

Authored By-

1. M. K. Shah Advocate  2.  CA Bhupesh Kumar Shah

11/3, Butler Road, Dalibagh, Lucknow- 226001

Email- bhu790@yahoo.com

Author 1 is a practicing income tax lawyer at Lucknow-UP

Author 2 is a member of the institute of Chartered Accountants of India


17 Responses to “Employee’s Provident Fund Act, 1952 vis-á-vis Income Tax Act 1961- Tax Treatment of PF Dues”

  1. Priyanka Dasgupta says:

    What is the percentage break up of employers contribution under PF voluntary coverage like EPF and EPS and Admin charges according to the new amendments in the act?

  2. nitish ranjan das says:

    whether any revised circular available in yahoo.com epfo website after 24/10/1973 regarding withdrawl /abolishing the grace period as allowed to employer by epf organisation

  3. Vikas says:

    Dear Sir

    Our Company has a privately managed PF trust and depoist the PF amount into that trust. Now I want to know whether service tax would be applicable on the admin charges under the Negative Tax regime

  4. Shweta says:

    Dear friends

    Which date is applicable for ESI/PF
    Date of tender of cheque or date of clearing of cheque

    Help me in this regard

  5. Rakesh says:

    My organization deducts PF on basic salary of 6500/month; actual basic shown to IT Dept is higher. My total deductions are 780 (PF) and 5720 (VPF). Employer contributes 780. I want to raise my VPF above 6500, however citing the reason that employer has to pay admin charges on my VPF contribution and do not want to pay for anything higher that 6500, my VPF contribution has been capped at 5720. Could you please share the legality of this argument.

  6. Sanjay Verma says:

    Dear Sir,

    Kindly share the actual circular for submission of contribution under EPF Act in 5 days grace period, clause (iii) of CPFC Circular No.E.128 (1) 60-III dated 19-3-1964 as modified by circular No.E11/128 (section 14-B Amendment)/73 dated 24-10-1973.

    With regards,
    Sanjay Verma

  7. Sangeeta N says:

    my query is that I was working in a bank but resigned after 25 months. The Bank has given the Provident fund dues but withheld their contribution(employer contribution) saying that employee is only entitled to employer contribution if he has been in employment for atleast 5 years. Is that a law? Do I have any recourse to claiming employer contribution

  8. Ajay says:

    Dear Sir,

    I joined a Company in Jan 2005 and left in June 2009. The Company has a registered PF Trust. During this period I have deposited following amounts as contribution to EPF and Interest thereon. :

    Employer’s Contribution to EPF and Interest thereon : Rs.102,212 and Rs.48,003
    Employee’s Contribution to EPF and Interest thereon : Rs.131,164 and Rs.63,725
    Voluntary Contribution to EPF and Interest thereon : Rs.605,000 and Rs.305314

    During the PY 2012-13, I have withdrawn entire amount of Rs.12,55,418 and Company has deducted TDS of Rs.295,102.

    The interest on Employer’s Contribution, Employee’s Contribution and Voluntary Contribution for the PY 2010-11 and PY 2011-12 is already offered for tax while filing the IT return of that respective years which was Rs.98,837 and Rs.98,527 respectively.

    Kindly advise how my tax liability will be computed during PY 2012-13 ? Is voluntary contribution is taxable in spite of paying tax earlier in the year under the head Salary ? If Voluntary Contribution is not taxable, under which section and can you please advise any case laws on this ?

  9. N.Shanmuganand says:

    Dear all,

    Regarding appended write-up,

    “CONCLUSION REGARDING ISSUE OF ‘DUE DATE’:

    Due date for payment of Provident Fund contributions is 15 days from the end of month in which wages are paid (plus grace period of 5 days). Thus, if wages pertaining to April’ 2012 is paid on, say, 7th May’ 2012, due date for payment of Provident Fund contribution is 20th June’ 2012 [i.e. 15th June’ 2012 as increased by grace period of 5 days].”

    It is very clear that the PF officials have not accepted the above mentioned procedure, which is further substantiated by the following point.

    • In the online system there are two columns named wage month and contribution month. If we select the wage month as November it would automatically show the contribution month as December, hence the system would calculate the interest for the respective period by default.

    • In our case, the company pays the salary on the 5th of every month (wages pertaining to April’ 2012 is paid on, say, 5th May’ 2012) and subsequently we pay the PF contribution on the 15th of the same month (May 15, 2012), in this cycle the amount realized date had crossed 20th of that particular month (realized date after May 20, 2012) then the PF office sent a show-cause notice to pay the interest for the non contribution period, for the days after 15th with damages, more so the interest and the damages was calculated up to the date of the show-cause notice (for example it could be 1 year, 2years etc).

    Looking forward for your exert opinion in this regard.

  10. Subhash Jangra says:

    Sir,

    Please tell me that can EPF contribution deposit in bank through demand draft ? if no then why ?

  11. Seshasayee says:

    Weather EPF is applicable for Rent collected in side the Hotel Building , It is a Fancy shop run by other person for that Rent being collected by the Hotel , Pls give reply for this question .

  12. NNSP says:

    Dear Sir,

    An employee is joining an organisation on 25th of June. He is not been paid anything for June. Instead June salary will be paid as arrears to him in July. Hence is it necessary to remit the PF in June month itself? Can we remit the PF in July along with arrears? Please confirm.

    Thanks.

  13. Deep says:

    Hi sir ,
    Could you please explain me is there any tax benefit due to PF deduction or not.

  14. mahendra says:

    what is min. esic pay in challan if there is no work in a month

  15. Amit Kumar Agrawal says:

    Dear Sir, If any body who is liable to maintain P.F. a/c but does not maintain it and retain whole amount of P.F contributed by itself and it’s employees, and give interest thereon. I want to take the legal view as per P.F. Act. about this case and income tax treatment also. The entity is covered under co-operative society.

  16. N G NAGARAJ says:

    Dear sir,
    I have opted for VRS,can I leave my PF contribution in the company itself,if so for how many years?For how many years will I get interest,is the interest earned taxable after VRS,please clarify.

  17. T.S.Mohana harish says:

    Its good and helpful for practical as well as for student point of view.

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