24 June 2010
The Recognised Provident Fund offered by private sector companies also provides good saving opportunities. As an employee, you have to contribute every month to the fund and so does the employer. The employer’s contribution is tax-free up to 12 per cent of the salary. Any contribution by the employer over and above this limit is taxed in the year in which it accrues.
For instance, if your basic salary is Rs 10,000 per month (dearness allowance does not form part of the pay) and the employer contributes Rs 1,500 per month towards RPF, 12 per cent of the basic salary, i.e. Rs 1,200 will be tax-free and the balance Rs 300 will be taxed. RPF also entitles you to rebate under Section 88. Interest up to 9.5 per cent per annum is exempt from tax and any rate higher than this is taxed.
You can withdraw the amount of corpus accumulated in your provident fund account while in service, subject to certain conditions. You can withdraw in order to buy immovable property, for treating illness, for the studies or the marriage of your children. But this is possible only after the corpus (principal plus interest) has been locked in for a specific period. For instance, if you want to withdraw to buy a house, you can do so after five years. If the withdrawal is for any other purpose, the minimum lock-in period is seven years.
Otherwise, you can withdraw the entire corpus on retirement or termination of service. With regard to the taxability of the sums withdrawn, certain conditions must be satisfied. You must have completed minimum five years of ‘continuous’ service before making a tax-free withdrawal.
If you withdraw from the accumulated RPF account within five years of service, the amount will be taxed.
However, another provision has to be noted. Suppose, you change jobs after working for a company for three years, you can transfer the accumulated balance from your old RPF account to the new RPF account and the three year period with the earlier employer will be considered when computing the five years for the purpose of withdrawal. The key word here is ‘continuous’ service and it is advisable to transfer the RPF account while job-hopping.
Suppose, an employee had to discontinue service within three years due to ill health or on account of discontinuance of employer’s business, he will be exempt from taxability of funds withdrawn from the RPF. If you make a withdrawal without the above conditions being fulfilled, the amount withdrawn will be taxed as follows.
Employer’s contribution will be taxable completely and so will the interest portion on employer’s and employee’s contribution. Further, your earlier rebates under Section 88 will be withdrawn and treated as your income in the year of withdrawal. Moving on to the post-retirement scenario, the employee can withdraw the entire RPF corpus in lumpsum which will be a tax-free withdrawal. However, he may choose to let the corpus remain with the company, and in such case, the corpus will continue to earn interest at the tax-free rate of interest that is presently 9.5 per cent.
So, if you are not in need of funds at the time you retire, considering the prevailing interest rates in the market, it would make sense to allow your RPF corpus to remain and earn some tax-free interest.
CAclubindia
