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PROVIDENT FUND

Provident fund is a scheme intended to give substantial benefits to an employee at the time of his retirement. Under this scheme, a specified sum is deducted from the salary of employee and also same amount is contributed by employer as a contribution towards the fund.

The contribution of employee and employer are invested in approved securities. Interest earned thereon is credited to the account of employee.

Hence, the amount credited in account of employee consists of following:

  • Employees’ contribution
  • Interest on Employees’ contribution
  • Employer’s contribution
  • Interest on Employer’s contribution

*The accumulated balance of provident fund is transferred to employee on retirement or resignation or his nominee, in case of death of employee.

Types of provident fund

  • Statutory Provident Fund(SPF)
  • Recognised Provident Fund(RPF)
  • Unrecognised Provident Fund(URPF)
  • Public Provident Fund(PPF)

Statutory Provident Fund (SPF)

It is governed by Provident Fund Act, 1925. It applies to government, railways, semi-government institutions, local bodies, universities and all recognised educational institution.

It is taxable as follows:

  • Employees’ contribution is allowed as deduction under section 80C in Income Tax Act, 1961.
  • Employer’s contribution to the Provident fund, interest on provident fund and lump sum amount received by employee on retirement or resignation is FULYY EXEMPT from tax.

Recognised Provident Fund (RPF)

Recognised Provident Fund is recognised by the commissioner of Income Tax for the purposes of Income Tax. It is applicable on all organisation having 20 or more employees.

The organisation covered under this scheme can either apply for government approved schemes or start a new provident fund.

It is taxable as follows:

  • Employees’ contribution is allowed as deduction under section 80C in Income Tax Act, 1961.
  • Employer’s contribution to provident fund is exempt upto 12% of salary.
  • Interest on provident fund is exempt upto 9.5% p.a.
  • Lump sum amount received on retirement is FULLY EXEMPT if retirement is due to following reasons :

a) Due to ill health

b) With instruction that balance in RPF should be transferred to a new employer

c) Due to shut down of employer’s business, or

Employee is retiring after providing 5 or more years of service.

However, in any other case NO EXEMPTION is provided on receipt of lump sum amount.

Unrecognised Provident Fund (URPF)

When the commissioner of income tax does not approve the provident fund scheme created by the employee and employer, then such scheme is called Unrecognised Provident Fund.

It is taxable as follows:

  • Employees’ contribution to provident fund is NOT subject to deduction.
  • Employer’s contribution to provident fund and interest on provident fund are exempt from tax.
  • Lump sum amount received on retirement is taxed as follows:

a) Employees’ contribution in lump sum amount is NOT subject to tax.

b) Interest on employees’ contribution in lump sum amount is taxable under head of income from other source.

c) Employer’s contribution and interest on such contribution in lump sum amount is taxable under head of salary.

Public Provident Fund (PPF)

This scheme of provident fund is generally available for everyone whether person is employed or unemployed. Any person can contribute to this scheme by opening a public provident fund account with any authorised bank. This scheme is introduced by government in which amount is paid after years.

The person can deposit an amount starting from Rs.500 to Rs.1,50,000.

It is taxable as follows:

  • Contribution to PPF is allowed as deduction under section 80C of Income Tax Act, 1961.
  • Interest on such contribution is also exempt tax.

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The author can be however contacted for further clarification at 9654182791 or via mail at caajay92@gmail.com

DISCLAIMER:- This Blog is for the purposes of information / knowledge and shall not be treated as solicitation in any manner or of for any other purposes whatsoever.

Author Bio

I run my own Firm at Roshanara Road Near by kamla Nagar , Delhi. My Contact No 9654182791 and Email Id caajay92@gmail.com I am in Practice Since 2017. I am also a Founder of Solution Tax View Full Profile

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