There are different types of provident funds from which a person can choose from for the purpose of investment or regular savings for retirement. They are discussed in detail below:
Table of Contents
Statutory Provident Fund
The scheme is set up under the Provident Funds Act, 1925. It is meant for government employees, universities, recognised educational Institutions, railways, etc. It is also known as the General Provident Fund (GPF). The interest rates of general provident funds are revised from time to time by the government. The private sector employees are not eligible for the general provident fund.
Taxability on Statutory Provident Fund
It is taxable as follows:
|
Particulars |
Income Tax Provision |
|
Employee Contribution to the Fund |
Deduction allowed under section 80C |
|
Employer's Contribution to the Fund |
Exempt from tax |
|
Interest Income |
Exempt from tax |
|
On Retirement |
The Lump Sum amount received by an employee is exempt |
Recognised Provident Fund
The Provident Fund Act, 1952 applies to all establishments employing 20 or more employees. The establishments covered under the scheme can either apply for the government-approved scheme or start a PF scheme by forming their trust. The establishments can join the government-approved scheme set up under the PF Act 1952, which is a recognised provident fund. Alternatively, the establishment's employer and employee can create a provident fund scheme by forming a trust, and funds are invested as per rules prescribed under the PF Act, 1952. The commissioner of income tax must approve the scheme to receive the status of the recognised provident fund.
Taxability on Recognised Provident Fund
It is taxable as follows under Income Tax Act:
|
Particulars |
Income Tax Provision |
|
Employee Contribution to the Fund |
Deduction allowed under section 80C |
|
Employer's Contribution to the Fund |
Exempt up to 12% of Salary* |
|
Interest Income |
Exempt up to 9.5% interest annum |
|
On retirement, because of below reasons: 1. Due to ill health, 2. With instructions that balance in RPF should be transferred to a new employer 3. Due to shut down of employer's business. or retirement after 5 years of service |
The lump sum amount received by an employee is exempt |
|
On retirement before 5 years of service and not due to any of the above reasons |
The lump Sum amount received is taxable. Exemption on the employer's contribution and interest income will be withdrawn. |
Unrecognised Provident Fund
If the commissioner of income tax does not approve the provident fund scheme created by the employer and employee (as mentioned above), then such scheme is an unrecognised provident fund scheme.
Taxability on Unrecognised Provident Fund
The taxability of the fund is as follows:
|
Particulars |
Income Tax Provision |
|
Employee Contribution to the Fund |
– |
|
Employer's Contribution to the Fund |
Exempt from tax |
|
Interest Income |
Exempt from tax |
|
Below amounts received on retirement : |
Taxed as below: |
|
– Employee contribution |
– |
|
– Interest on employee's contribution |
Taxable under the head 'Income from other sources' |
|
– Employer's contribution |
Taxable under the head 'Salary' |
|
– Interest on employer's contribution |
Taxable under the head 'Salary' |
Public Provident Fund
The government has established a provident fund for the general public. Any person can contribute to this scheme by opening a public provident fund account with the authorised bank. The person can deposit an amount starting from Rs.500 to Rs.1,50,000. The corpus of the PPF can be fully withdrawn after the completion of 15 years.
Taxability on Public Provident Fund
The tax provisions applicable to the fund is as below:
|
Particulars |
Income Tax Provision |
|
Contribution |
Deduction allowed under section 80C |
|
Interest Income |
Exempt from tax |
The salary for the above purpose of funds shall be basic and dearness allowance.
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