Before starting the Income tax benefits of Provident Fund or PF, Lets understand about what is Provident fund and its types.
A provident fund is a type of retirement savings scheme. Generally, employees give a portion of their salaries to the PF and employers must contribute on behalf of their employees. There are mainly four types of PF and these have different benefits under Income tax. The funds are:-
1. Statutory Provident fund (SPF) – SPF is a type which is only meant for Government or Semi-Government employees, university or affiliated educational institutions
2. Recognized Provident fund (RPF) – RPF are the Provident Funds recognized by commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952 like Employees’ Provident Fund (EPF).
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3. Unrecognized Provident fund (UPF) – Such schemes are started by employer and employees for a particular establishment, but are not approved by The Commissioner of Income Tax.
4. Public Provident fund (PPF) – PPF is a tax-free savings scheme offered by the Government of India, wherein interest on the account is set for every quarter and is paid by the government.
Treatment of PF under Income Tax
Till date, PF contributions are considered to be the highest tax-free investments which also have a deduction in the year of investment. The contributions to these PF accounts are eligible for interest and are available for withdrawal after a minimum lock-in period. Tax exemptions and deductions are available on both the interest and contributions subject to limits specific therein.
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Comparison of various provident funds
| Particulars | Statutory Provident fund | Public Provident fund | Recognized Provident fund like EPF | Unrecognized Provident fund |
| Employer’s contribution | Fully exempt | N/A | 12% of employee’s salary | Fully exempt |
| Employee’s contribution | Deduction under section 80C | Deduction under section 80C | Deduction under section 80C | No deduction |
| Interest on contribution | Fully exempt | Fully exempt | Only 9.5% is exempt | Not taxable |
| Lump sum payment | Fully exempt | Fully exempt | Fully exempt (except in some cases) | Only employee’s contribution will be exempt |
However, there are some conditions in case of Recognized Provident funds or RPF exemptions, like:-
- Employee has worked for 5years or more.
- If employee has worked for less than 5years, the reasons should be beyond employees control like sudden ill-health, insaneness, discontinuing of business etc.
- In case employee get transfer from one employer to another who maintain RPF balance, then year of work
- Entire balance standing in fund is transferred to Pension scheme u/s 80CCD.
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Minimum and Maximum Contribution in Provident Fund
Other than salaried employees, PF gives benefit to other individuals as well under income tax act. As per section 80C, an Individual or HUF can claim a maximum deduction of Rs 1,50,000. If an individual contributes in :-
| Fund | By whom | Amount |
| Statutory Provident Fund or Recognized Provident Fund | Self | Minimum: 500 Maximum: 1,50,000 Per account |
| Public Provident Fund | Self, Spouse, Child | Minimum: 500 Maximum: 1,50,000 Per account |
| Approved Superannuation Fund | Self | Minimum: 500 Maximum: 1,50,000 Per account |
Deduction to employers from Business Income’ for contributing in PF
Under section 36(1)(iv) deduction is allowed for contribution towards provident funds. It says that deduction will be allowed to the employer from his/her business income regarding the payment he/she made to the employee, if the following conditions are satisfied:-
- The PF should be one recognized or approved according to the Income Tax Act,1961 i.e., Recognized provident fund, Public Provident Fund, Statutory Provident fund and not Unrecognized Provident Fund.
- The amount contributed should be periodic payment and not an adhoc payment to start the fund.
- Arrangement should be made for TDS i.e., tax deduction at source.
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Tax Treatment of Employee’s Contribution in Business Income
Sum received by the employer from his employees as contributed to any Provident Fund shall be treated as Business income. Deduction shall be allowed only if such sum is credited by the assesse to the employees account in the relevant on or before the due date.
Due date as per the Employees Provident Funds Scheme 1952, the contribution for any particular month shall be paid within 15 days of the close of every month. Further grace period of 5days is allowed.
Balance will be chargeable to tax under the head Profits or Gains and Business or Profession. i.e., Sum received from employer by employee as contributions minus Sum credited by the employer to the employees account in the relevant fund on or before the due date.
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Important Points to Note
- Employer and Employee both can contribute as much as they want but In case of RPF, only a limit of percentage will be exempt.
- Payment of various provident funds are exempt for salaried employees according to the type of fund it is.
- On the other hand, interest is generated and received by the employee on the contribution done by him or the employer which is exempt in some case.
- Employee’s contribution is not taxable and deduction is provided to the employee for contributing.
- These PF can be withdrawal partially or fully according to the individual’s choice and will be exempt in some case whether withdrawn partially or fully.
- Salary considered for calculation of exempt amount in case PF is Basic Pay+ DA i.e., daily allowances (if in term of retirement benefits) + Commission (if based on sales turnover).
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The author of above article is Krittika Pahwa.
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