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Retirement Benefits In Indian Tax system

CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)

10 August 2010

Retirement Benefits In Indian Tax system

On the day of retirement, almost every employee smarts under a sense of injustice. He forced to make room for some half-backed professional just when he himself is ready for a doctorate in competency. Be that as it may, it is necessry to plan for thid eventuality and hence every employee must know not only the quantum of the various terminal benefits he would be geting,but also tax implications. The employee may have higher quantum of benefits by being fortunate in choosing a good employer but he has no choice in respect of taxes. Within certain limits, the terminal benefits are exempt.

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CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)
Replied 10 August 2010

Provident Fund In Indian Tax System

In India there are four types of Provident Fund.

Recognized Provident Fund (RPF)
Unrecognized Provident Fund (URPF)
Statutory Provident Fund (SPF)
Public Provident Fund (PPF)

According to the provident fund law all provident funds such as Recognized provident fund, unrecognized provident fund, public provident fund and statutory provident fund come under the bracket of tax exemption.

Recognized Provident Fund (RPF) - This type of provident fund is applicable to an organization with strength of 20 or more employees. A Recognized provident fund should be approved by the Commissioner of Income Tax. An employer and a group of employees can start this type of recognized provident fund together by forming a trust. According to Section 80-C upto 12% of salary is exempted from the tax. Interest rate of 9.5% is added to the salary. Nothing will be taxable if the employee left the job after five years of completion of service or an employee left the job due to terminal illness. If the business is shut down, the employee is not subjected to tax.

Unrecognized Provident Fund (URPF) – This type of provident fund is not recognized by the commissioner of income tax. They have a different tax structure other than recognized provident fund (RPFs). There will be no deduction under section 80-C available. Any amount of contribution is not taxable. Here, the employer’s contribution is taxable as salary income. Employees own contribution is non-taxable.

Statutory Provident Fund (SPF) - This fund is usually applicable for Government organizations, Universities and educational institutes.

Public Provident Fund -Public provident fund commonly known as PPF is one of the best tax saving schemes in India. It is mostly preferred by the employees working in private organizations. Many people who work in private organizations do not have any structured pension plans like government organizations.

Places where you can open a provident fund account:

General post office (GPO) and its branches
Public sector banks throughout the country
Organization or industry where you are employed

If an employee is leaving the job, his/her provident fund is transferable from one company to another provided a provident fund account numbers. After the completion of terms in the office or at the maturity of the term, an individual person or an employee can claim his/her provident fund.

Procedure of claiming Provident fund

This is a somewhat lengthy procedure. This should be noted to claim a provident fund it needs a standard procedure to claim.

Let us have a look at the corporate procedure to claim a provident fund: Once the exit interview with the HR is complete, a provident fund form will be handed over to the employee:

To get the provident fund amount, the employee needs to fill his/her provident fund account number on the PF form, without a correct PF number, the PF department will not disburse the amount.
Employee can withdraw their PF money in two ways:
- An individual or employee can claim through banker’s check that will be issued by the PF office.
- On their individual bank account. To deposit the PF amount into their account employee needs to declare their bank account details on the provident fund form.
On provident fund form, it is also mandatory to paste two revenue stamps. Without revenue stamps, the PF form will be rejected from PF office.
According to a new clause in 2010 it is also mandatory to attach a cancelled check if an employee wants to encash the PF amount into their account to verify the account number and bank address. This action is implemented to stop any kind of fraud claims.
It will almost take three to six months to get the provident fund amount into the account.

How to transfer a provident fund account?

Provident fund amount is transferable. If an employee is changing his /her job, they can transfer their PF account from the current company. To transfer the provident fund account, the employee needs to provide their previous PF account number to their new organization.

Procedure for withdrawal partial amount from provident fund account

If an employee working in an organization wants to withdraw partial amount, it can be under circumstances when the employee is getting married or buying a property.