Tax implications on recognised provident funds

Provident Fund (PF) is a defined contribution plan, where the employee contributes 12% of the pay on a monthly basis; the employer is responsible for an equal contribution, out of which a part is remitted towards the pension fund.

The employee may opt for an additional voluntary contribution. However, the total employee contribution may not exceed 20% of the pay. The employee may also request the employer to limit the amount of “pay” for computations of PF to 6,500 per month. Such an option may be exercised only at the beginning of employment. The balance in the PF account earns a cumulative interest at government specified rates, currently at 9.50% per annum.

Employees are entitled to withdraw the balance on retirement at the age of 55. Early withdrawal is permissible in case of exigencies such as:

1) Retirement on account of permanent and total incapacity for work (suitable certification required)

2) Migration from the country

3) Retrenchment, etc

Employees are entitled to refundable/non-refundable loans for purchase/construction of house, education, marriage, treatment for specified illness for self/family members, etc, on meeting the specified conditions.

Tax implications on recognised provident funds – The employer contributions (12% of pay less contribution to pension of 542 pm) is not considered taxable. The employee contributions (12% of pay) are entitled for a deduction of up to 1 lakh while computing the taxable income (under Section 80C).

The interest on employer contributions at rates specified is not taxable to the extent the credit does not exceed government-specified rates (currently at 9.5% pa). The Interest on employee contributions is not taxable to the extent the credit does not exceed government-specified rates (currently at 9.5% pa). The withdrawal of the balance on retirement is not taxable if the employee has rendered continuous service of five years.