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what-is-provident-fund-and-tax-liability

 

What is Provident Fund and Tax Liability?

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Introduction-

Provident fund is one of secured fund in which the employee contribute a part of his salary and the employer also contributes on behalf of his employee. There are different types of Provident funds:

  1. Statutory Provident Fund (SPF): This scheme is mainly for employees of Government, Semi Government, Railways, Universities, Local Authorities, Reserve Bank of India, Insurance Companies etc.
  2. Recognized Provident Fund (RPF): This scheme is applicable to an organization in which 20 or more employees are employed. An organization can also voluntarily opt for this scheme. This scheme must be approved by The Commissioner of Income Tax.
  3. Unrecognized Provident Fund (UPF): This scheme is started by employer and employees in an establishment. This scheme is not recognized and approved by The Commissioner of Income Tax.
  4. Public Provident Fund (PPF): Under this scheme, every salaried or self employed person can make his contribution. Minimum contribution is Rs. 500 or maximum contribution is  Rs.1,50,000 in any financial year.
 

Exemption and their Tax Liability-

  • The Contribution made by an employee is covered under section 80C.
  • The Contribution made by an employer is Tax free.
  • Interest amount credited during the financial year is not treated as income and hence it is Tax free.

The amount redeemed at the time of retirement is Tax free.

2. Recognized Provident Fund (RPF):

  • The Contribution made by an employee is covered under section 80C.
  • The Contribution made by an employer up to 12% is exempt from Income Tax. In excess of 12% of salary is treated as salary income of the employee and is taxable in the year in which year excess contribution is made.
  • Interest earned up to 9.5% on PF balance (employee’s + employer’s contributions) is tax free. Any rate higher than 9.5% is taxable as ‘salary’ in the year in which it is accrued.
  • The amount redeemed at the retirement or resignation is Tax free if the assessee continues the service for 5 years or more.

3. Unrecognized Provident Fund (UPF):

  • The Contribution made by an employee is not covered under section 80C.
  • The Employer’s contribution is not treated as income and not taxable in the year of investment. It is tax free in the year of contribution.
  • Interest earned is not treated as income in the year it is credited and hence not taxable in the year of accrual.
  • At the time of redemption / retirement, the employer’s contributions and interest thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged other sources.
  • PPF is a best saving plan for future or retirement planning.
  • This scheme also covered under triple EEE (Exempt, Exempt, Exempt) category, means that the amount which you have deposited is covered under section 80C, the interest earned thereon is tax free and even the maturity amount is also tax free.
 

PF Withdrawal Rules

1. Withdrawal restrictions-

Whole PF amount withdrawal is not allowed till the age of retirement. The PF account consists of the contribution made by the employer, a contribution made by employee and interest earned on employer and employee contribution. There is one exception– The female employees resigning from the services for getting married or due to child birth or pregnancy. They can withdraw the whole EPF Balance.

2. Retirement Age-

The retirement age is 58 yrs. The person can withdraw up to 90% of PF balance on attaining the age of 57 yrs.

3. PF Membership and employment-

The membership as the employee would not withdraw the full PF balance till the age of retirement

 

TDS on PF Withdrawal-

When TDS is not applicable

  • No tax on PF Withdrawal after 5 years or more of continuous service.
  • If the service has been terminated due to ill-health and he withdraws his accumulation (balance).
  • If the employer discontinues the business or any cause beyond the control of Employee.
  • If the amount, which is to be withdrawn as PF is less than Rs. 50,000.
  • If an employee withdraws an amount of more than or equal to Rs. 50,000 before 5 years but submits Form 15G /15H along with his / her PAN.
  • When a transfer of PF is from one A/c to another A/c.

When TDS is applicable

When accumulation is more than Rs. 50,000 and the employee i.e. the EPF member has worked less than 5 years, then two cases are there:

  • Deduction of TDS will be at 10% if PAN is submitted, but 15G/15H Forms are not.
  • Deduction of TDS will be at maximum marginal rate i.e. 34.608% if PAN is not submitted.

Detailed Summary of Provident Fund-

Particulars Recognised PF Unrecognised PF Statutory PF Public PF
Employer’s Contribution Contribution to 12% of salary is exempt, above that is added to salary income of the employee. Not taxable in the year of contribution. Not taxable Not Applicable
Employee’s Contribution Covered under section 80C Not covered under section 80C covered under section 80C covered under section 80C
Interest on PF Any interest over and above 9.5% is added to Income from Salaries. Until 9.5% interest is exempt from Income Tax Not taxable in the year it is credited. Exempt from Income Tax Exempt from Income Tax
Repayment/ Redemption on retirement, resignation or termination Fully Exempt if; *Employee leave the Job after 5 years. *Where period of service is less than 5 years, the termination due to ill health or discontinues of business of employer * PF balance is transferred to RPF with new employer Contribution from employer and interest thereon is taxable under the head Income from Salaries; Contribution by an employee is not taxable, and Interest on employee’s contribution is taxable under the head Income from Other Sources. Exempt from Income Tax Exempt from Income Tax

 

Note:

  1. The withdrawal does not attract any tax if an employee has been terminated because of certain reasons beyond his control, irrespective of the number of years of employment.
  2. In case, individual withdraw before 5 years, the amount becomes taxable in the same financial year. Thus, the amount has to be shown on your tax return for the next assessment year.
  3. If the person had claimed benefits under Section 80C on own PF contribution, it will be taxed as salary. The interest earned on your own contribution will be taxed as ‘income from other sources’ and taxed according to the respective tax slabs.
  4. The funds which are transferred to a National Pension System (NPS) from a recognized provident fund (PF) account and will not attract any tax.
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