17 February 2009
Part A of the Fourth Schedule provides for tax treatment of recognised provident funds and the contributions thereto.
Contribution to recognised provident fund would qualify for deduction in the hands of the contributor under Sec. 80C and refund therefrom of both principal and interest will be exempt under Sec. 10(12) of the Income-tax Act, subject to the provisions under Rule 8 of Part A of the Fourth Schedule. Sec. 10(12) itself makes such a qualification.
Rule 8 makes premature repayment of accumulated balance from recognised provident fund taxable in respect of employer’s contribution, if the employment with the employer is for less than five years except on grounds of ill health or such other reason beyond the control of the employee. This tax is avoided, if the fund is transferred to another recognised provident fund of the same or a different employer.
Rule 10 makes such refund, tax deductible at source, where such repayment is taxable. Sec. 89 read with Sec. 17(3) and Rule 21A tempers the bunching effect of taxing the accumulated balance for more than a year in the year of payment by spreading it for three years. The employer was, therefore, right in recovering the tax.
The employee should offer the entire contribution of the employer in the year of receipt subject to a claim for relief under Sec. 89, if the rate applicable for earlier two years is lesser, so as to get the benefit of such lower rate.
17 February 2009
Recognised Provident Fund (RPF) covered by Employee's Provident Fund and Miscellaneous Provisions Act, 1952 applicable to establishments with 20 or more employees. Those with fewer employees are also welcome to opt for it. The PF Commissioner manages the funds. However, if the establishment desires to manage its own funds, a trust approved by the IT Commissioner, has to be created which will invest the funds in accordance with the PF Rules. Employee's contributions are covered by Sec 88 and there is no ceiling on his voluntary contribution. Employer's contribution in excess of 12% of employee's salary as well as interest paid exceeding 9.5% p.a. is charged to tax. Payment of accumulated balance in RPF is taxable under Rule 9(1) of Schedule IV(A) to the ITA, unless the employee renders continuous service with his employer for 5 years or the discontinuance is due to causes beyond control of the employee. This balance is also exempt if it is transferred to the employee's individual account in any RPF maintained by his new employer or by the PF commissioner. Service under his former employer or employers shall be included in computing the total period of continuous service. Out of the total contribution of the employer (12% of basic salary of the employee), 8.33% or Rs 542 whichever is less, is deposited in the Employee Pension Fund and the balance to the Employee Provident Fund as illustrated below:
Basic Salary of Employee Employer's Total Contribution (12% of Basic Salary) 8.33% of Salary Rs 542 Contribution Pension Fund (Least of 'b' and 'c') Contribution Provident Fund (3.67
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