Provident fund scheme is a retirement benefit scheme. Under this scheme a stipulated sum is decucted from the salary of the employee as his contribution towards the fund. The employer also generally contributes simultaneously an equal amount out of its pocket to the fund.
The contributions of employee and employer are invested in gilt-edged securities. Interest earned thereon is also credited to the provident fund account of the employees. Thus, the credit balance in the provident fund account of an employee consists of employee’s contribution, interest on employee’s contribution, employer contribution and interest on employer’s contribution.
The accumulated sum is paid to the employee at the time of his retirement or resignation. In case of death of an employee sum is paid to his legal heirs.
Since the scheme encourages personal savings at micro level and generates funds for investment at macro level, Government provides deduction under section 80C.
TYPES OF PROVIDENT FUNDS:
- Statutory provident fund
- Recognized provident fund
- Unrecognized provident fund
- Public provident fund
TAX TREATMENT –
The table given below highlights the exemptions and deductions available in respect of contributions to and payments from various provident funds (in the case of salaried employees):
|Statutory provident fund||Public provident fund||Recognized provident fund||Unrecognized provident fund|
|Employer’s contribution to provident fund||Any amount of contribution is not taxable.||Employer does not contribute.||Not treated as “income” up to 12 percent of salary. Excess of employer contribution over 12 percent of salary(ref note 1) is included in salary income of the employee||Any amount of contribution is not taxable.|
|Deduction under section 80C on employee’s contribution||Available||Available||Available||Not Available|
|Interest credited to provident fund||Exempt from tax||Exempt from tax||Not treated as “income” if rate of interest does not exceed the notified interest(9.5 percent ) excess of interest over the notified rate is, however taxable||Not taxable|
|Lump sum payment at the time of retirement or termination of service||Exempt from tax||Exempt from tax||Exempt subject to certain conditions*. Refer note 2||Refer note 3|
- “Salary” here means basic salary. It includes dearness allowance and dearness pay, if the terms of employment so provide. It also includes commission where commission is determined at a fixed percentage of turnover achieved by an employee, then such commission would partake of a character of salary.
- Employee leaves the job after 5 years of employment; or
- Where the service period is less than 5 years, the reason for termination is discontinuance of employer’s business or ill health; or
- The balance in RPF is reassigned to RPF with the new employer on re-employment.
- Contribution from employer and interest on that is taxable under the head Income from Salaries.
Contribution by an employee is not taxable, and employee’s contribution interest is taxable under the head Income from Other Sources.
-Maitri Badani (Article Assistant)