CA Sandeep Kanoi
Section 10(11) and 10(12) of the Act deal with exemption on payments from provident funds, while section 80C of the act deals with allowance of deductions on contributions to provident funds. The following are the types of provident funds.
- 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 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 (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.
- Statutory Provident Fund (SPF): This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.
- Public Provident Fund (PPF): This is a scheme under Public Provident Fund Act 1968. 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. 150,000 per annum. The contribution made along with interest earned is repayable after 15 years, unless extended. All about PPF and Income tax benefit
Tax treatment of Provident Fund can be discussed under two scenarios:
- One during continuity of job, and
- Upon receipt of accumulated balance of provident fund at the time of retirement or resignation
Summarized table showing tax treatment of provident funds
|Fund||During Continuity of Job||Upon Retirement|
|Employee’s Contribution||Employer’s Contribution||Interest on Provident Fund||Repayment of sum on retirement, resignation or termination|
|RPF||Deduction under Section 80C is available.||Exempt upto 12% of Salary. Thus Contribution made by employer exceeding 12% shall be added to employee’s salary Income.||Exempt upto 9.5%. Interest exceeding 9.5% shall be added to employee’s Salary Income.||Nothing is taxable subject to following conditions:
If none of the above conditions are satisfied then:
|URPF||No deduction under section 80C available||Any amount of contribution is not taxable||Not taxable||Sum received on retirement/ termination comprise of following:Employer’s Contribution and interest there on: Taxable as Salary Income.
Employee’s own Contribution : It is not taxable.
Interest on employee’s contribution: Taxable as income from other sources.
|SPF||Deduction under Section 80C is available.||Fully Exempt||Fully Exempt||Fully Exempt|
|PPF||Assessee / Employee can make contribution to PPF, No concept of Employer’s Contribution. Deduction under section 80C available on contribution made.||Amount received (including interest) is Fully Exempt.|
Frequently asked Questions:-
Q. When I left my earlier company, I opted for the withdrawal of my provident fund money that was being maintained by the company in a trust. The company deducted tax on withdrawal.I was under the impression that Employees Provident Fund is tax-free.Also, if I withdraw money from my Public Provident Fund account will that also be subject to tax?
A. – We presume your earlier company maintained a recognised provident fund account, which is referred to as RPF. On withdrawal from RPF at the time of termination of service, the accumulated balance is exempt from tax only if you have been in continuous service for a period of five years or more. Service rendered to the previous employer is also to be included. If the continuous service is less than five years due to reasons beyond your control (ill health, or discontinuance of employer’s business), you still will be eligible for exemption. If not, then you will be taxed on withdrawal of the accumulated balance from the RPF. Withdrawals from the PPF account is based on defined eligibility criteria. Such withdrawals are not taxed.
Q. I have got an offer from a company who has filed for an exemption from Provident Fund laws.
1. Is it legal to have such exemptions?
2. What are my alternatives to proceed with this company with respect to my PF account with my current company?
3. Can I still contribute to the PF account and what will be the tax benefits on the same?
A. Section 16 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, stipulates certain conditions that need to be satisfied for an establishment to be exempted from the operation of this Act. So it may be possible that this company is availing of the exemption legally. In respect of your PF account with your earlier employer, you could choose either of the following propositions:
1. Close the account and withdraw the balance lying to your credit. If your contributions are pertaining to five or more years of continuous period of employment, then there would be no tax impact on such withdrawal.
2. Transfer the balance PF from your old employer to your new employer. In this case, though, there would be no fresh contributions during your employment with the new employer.
Q. I have changed my job. Can I transfer my Provident Fund deducted by the previous employer to my Provident Fund account with the new employer?
A. Yes, you can transfer your old Provident Fund account to your new employer. The process to do this is very simple. Upon your change in employment, file a Form 13 with the new employer. Thereafter, the labour consultant or human resources department of your new employer shall follow up on the transfer process with the Provident Fund authorities.
Q. Can I take an withdrawal/advance from the balance accumulated in my Provident Fund account?
A. Yes, you can take a withdrawal/advance from your Provident Fund account. Here is the process:
- Upon resignation or retirement from an establishment you can apply for PF withdrawal using Form 19. Withdrawal is allowed under two options:
- If the member has attained 55 years of age; or
- ii. The member should not work in any covered establishment for a period of 2 months from the exit date.
Additionally, you also have an option to withdraw funds from your Employee Pension Scheme. If you choose to do so, you will need to file an application using Form 10C.
- You can also take an advances from your Provident Fund account, but only for certain specified purposes. The application for an advance is made using Form 31. Advance may be availed for the following purposes:
- Marriage expenses for self, son, daughter and brother / sister
- Education for self, son, daughter
- Medical treatment
- Purchase or construction of dwelling house.
- Repayment of housing loan
- Purchase of plot
- Addition or alteration of house
- Repair of house
- Lockout or closure of establishment by employer
- Withdrawal prior to retirement
- Please note that the amount of advance or withdrawal is not required to be refunded back into the account under normal circumstances. However, if the amount is not utilized for the specified purpose, then the same will need to be refunded with penal interest.
- A fixed minimum balance in the account has to be maintained before arriving at the amount of advance that can be taken from the account.
Q.Interest Rate for PF
A. The rate of interest that you earn on your PF investment is fixed by the Central Government every year in March / April. The rate of interest changes every year, but due to the nature of politics in India, it is usually higher than the prevailing market rates.
Q. What is the taxability of interest on Provident fund deposits ?
A. The tax treatment of interest on Provident Fund is as follows
-Recognized Provident Fund:Interest on provident fund is exempt up to 9.5%. Interest exceeding 9.5% will be added to employee’s salary income
-Unrecognized Provident Fund: Not Taxable
-Statutory Provident Fund: Fully Exempt
-PPF: Fully exempt
(Republished with amendments)