Provident Fund and its taxability – Individual Taxation

Under Income Tax Act, 1961, contribution by employer and employee to the provident fund account enjoys certain tax benefits and some are taxable as well. Provident Funds 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.

There are many provident funds in which the contribution can be made and the taxability of the same depends upon the type of provident fund in which the contribution is made. Basically, there are three types of Provident Fund Schemes provided by the employer, namely Statutory provident fund, Recognised provident fund and Unrecognised provident fund. However, an employee may also contribute to the Public Provident Fund scheme.

Statutory provident fund- This 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 universities and recognized educational institutions.

Taxability:

• Employer’s contribution to provident fund – Exempt
• Deduction under Section 80C – Available for employee’s own contribution
• Interest credited to provident fund – Exempt
• Payment at retirement or termination of service – Exempt

Recognized Provident Fund – This fund is one which is recognized by the Commissioner of Income tax in accordance with the rules contained there in the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952. According to this Act, any organization, which employs 20 or more persons, is obligated to register under the Act and start a PF scheme for the employees in the organisation.

Taxability:

• Employer’s contribution to provident fund – Exempt up to 12% of salary – excess is taxable
• Deduction under Section 80C – Available for employee’s own contribution
• Interest credited to provident fund – Exempt up to notified rate (now 9.5%)
• Payment at retirement – Taxable except in following under mentioned circumstances -

The employee should have rendered continuous service with his employer for 5 years or more; or if not so, he should have been terminated due to ill health, due to discontinuation of employer’s business or by reason beyond his control. If he has found another employment, the balance due to him should have been transferred to his account in the recognised provident fund of the new employer.

Unrecognized Provident Fund - Unrecognized provident fund is the provident fund which is neither a statutory provident fund nor a recognized fund. This scheme is started by an employer which is not approved by the Commissioner of Income Tax.

Taxability:

• Employer’s contribution to provident fund – Exempt from tax
• Deduction under Section 80C – Not Available
• Interest credited to provident fund – Exempt
• Payment at retirement – Employee’s own contribution is exempt but interest on his own contribution is taxable under the head “income from other sources”. Payment received towards the employer’s contribution and interest thereon is taxable under the head “Salaries”.