Provident Fund :
Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The employer also generally contributes the same amount out of his pocket, to the fund. The contribution of the employer and the employee are invested in approved securities. Interest earned thereon is also credited to the account of the employee. Thus, the credit balance in a provident fund account of an employee consists of the following:
(i) employee‘s contribution
(ii) interest on employee‘s contribution
(iii) employer‘s contribution
(iv) interest on employer‘s contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation. In the case of death of the employee, the same is paid to his legal heirs.
The provident fund represents an important source of small savings available to the Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a provident fund account.
There are four types of provident funds:
(i) Statutory Provident Fund (SPF)
(ii) Recognised Provident Fund (RPF)
(iii) Unrecognised Provident Fund (URPF)
(iv) Public Provident Fund (PPF)
The tax treatment is given below:
| Particulars | Recognized PF | Unrecognized
PF |
Statutory PF | Public PF |
| Employer‘s
Contribution |
Amount in excess of 12% of salary is taxable | Not taxable yearly | Fully exempt | N.A. (as there is only
assessee‘s own contribution) |
| Employee‘s
Contribution |
Eligible for deduction u/s 80C | Not eligible for deduction | Eligible for deduction u/s 80C | Eligible for deduction u/s 80C |
| Interest Credited | Amount in excess of 9.5% p.a. is taxable | Not taxable yearly | Fully exempt | Fully exempt |
| Amount received
on retirement, etc. |
See Note (1) | See Note (3) | Fully exempt u/s 10(11) | Fully exempt u/s 10(11) |
Notes:
(1) Amount received on the maturity of RPF is fully exempt in case of an employee who has rendered continuous service for a period of 5 years or more. In case the maturity of RPF takes place within 5 years then the amount received would be fully exempt only if the service had been terminated due to employee‘s ill-health or discontinuance or contraction of employer‘s business or other reason beyond control of the employee. In any other case, the amount received will be taxable in the same manner as that of an URPF.
(2) If, after termination of his employment with one employer, the employee obtains employment under another employer, then, only so much of the accumulated balance in his provident fund account will be exempt which is transferred to his individual account in a recognised provident fund maintained by the new employer. In such a case, for exemption of payment of accumulated balance by the new employer, the period of service with the former employer shall also be taken into account for computing the period of five years‘ continuous service.
(3) Employee‘s contribution is not taxable but interest thereon is taxable under ‘Income from Other Sources‘. Employer‘s contribution and interest thereon is taxed as Salary.
(4) Salary for this purpose means basic salary and dearness allowance – if provided in the terms of employment for retirement benefits and commission as a percentage of turnover.
(1) Statutory Provident Fund (SPF): The SPF is governed by Provident Funds Act, 1925. It applies to employees of government, railways, semi-government institutions, local bodies, universities and all recognised educational institutions.
(2) Recognised Provident Fund (RPF): Recognised provident fund means a provident fund recognised by the Commissioner of Income-tax for the purposes of income-tax. It is governed by Part A of Schedule IV to the Income-tax Act, 1961. This schedule contains various rules regarding the following:
(a) Recognition of the fund
(b) Employee‘s and employer‘s contribution to the fund
(c) Treatment of accumulated balance etc.
A fund constituted under the Employees‘s Provident Fund and Miscellaneous Provisions Act, 1952 will also be a Recognised Provident Fund.
(3) Unrecognised Provident Fund (URPF): A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.
(4) Public Provident Fund (PPF): Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of the fund is open to every individual though it is ideally suited to self-employed people. A salaried employee may also contribute to PPF in addition to the fund operated by his employer. An individual may contribute to the fund on his own behalf as also on behalf of a minor of whom he is the guardian.
For getting a deduction under section 80C, a member is required to contribute to the PPF a minimum of Rs 500 in a year. The maximum amount that may qualify for deduction on this account is Rs 1,50,000 as per PPF rules.
A member of PPF may deposit his contribution in as many installments in multiples of Rs 500 as is convenient to him. The sums contributed to PPF earn interest at 8.7%. The amount of contribution may be paid at any of the offices or branch offices of the State Bank of India or its subsidiaries and specified branches of banks or any Post Office.
Illustration
Mr. A retires from service on December 31, 2015, after 25 years of service. Following are the particulars of his income/investments for the previous year 2015-16:
| Particulars | Rs |
| Basic pay @ Rs 16,000 per month for 9 months
Dearness pay (50% forms part of the retirement benefits) Rs 8,000 per month for 9 months Lumpsum payment received from the Unrecognised Provident Fund Deposits in the PPF account |
1,44,000
72,000 6,00,000 40,000 |
Out of the amount received from the unrecognized provident fund, the employer’s contribution was Rs 2,20,000 and the interest thereon Rs 50,000. The employee’s contribution was Rs 2,70,000 and the interest thereon Rs 60,000. What is the taxable portion of the amount received from the unrecognized provident fund in the hands of Mr. A for the assessment year 2016-17?
Solution
Taxable portion of the amount received from the URPF in the hands of Mr. A for the A.Y. 2016-17 is computed hereunder:
| Particulars | Rs |
| Amount taxable under the head “Salaries”:
Employer‘s share in the payment received from the URPF Interest on the employer‘s share Total Amount taxable under the head “Income from Other Sources” : Interest on the employee‘s share Total amount taxable from the amount received from the fund |
2,20,000 50,000 2,70,000
60,000 3,30,000 |
Note: Since the employee is not eligible for deduction under section 80C for contribution to URPF at the time of such contribution, the employee’s share received from the URPF is not taxable at the time of withdrawal as this amount has already been taxed as his salary income.
Illustration
Will your answer be any different if the fund mentioned above was a recognised provident fund?
Solution
Since the fund is a recognised one, and the maturity is taking place after a service of 25 years, the entire amount received on the maturity of the RPF will be fully exempt from tax.
Illustration
Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2015-16. You are required to compute his gross salary from the details given below:
| Basic Salary | Rs 10,000 p.m. |
| D.A. (50% is for retirement benefits) | Rs 8,000 p.m. |
| Commission as a percentage of turnover | 1% |
| Turnover during the year | Rs 5,00,000 |
| Bonus | Rs 40,000 |
| Gratuity | Rs 25,000 |
| His own contribution in the RPF | Rs 20,000 |
| Employer’s contribution to RPF | 20% of his basic salary |
| Interest accrued in the RPF @ 13% p.a. | Rs 13,000 |
Solution
Computation of Gross Salary of Mr. B for the A.Y.2016-17
| Particulars | Rs | Rs |
| Basic Salary [ Rs 10,000 × 12] | 1,20,000 | |
| Dearness Allowance [Rs 8,000 × 12] | 96,000 | |
| Commission on turnover [1% × Rs 5,00,000] | 5,000 | |
| Bonus | 40,000 | |
| Gratuity [Note 1] | 25,000 | |
| Employee‘s contribution to RPF [Note 2] | – | |
| Employers contribution to RPF [20% of Rs 1,20,000] | 24,000 | |
| Less : Exempt [Note 3] | 20,760 | 3,240 |
|
Interest accrued in the RPF @ 13% p.a. |
13,000 |
|
| Less : Exempt @ 9.5% p.a. | 9,500 | 3,500 |
| Gross Salary | 2,92,740 |
Note 1 : Gratuity received during service is fully taxable.
Note 2 : Employee‘s contribution to RPF is not taxable. It is eligible for deduction under section 80C.
Note 3 : Employers contribution in the RPF is exempt up to 12% of the salary.
i.e., 12% of [Basic Salary + Dearness Allowance forming part of retirement benefits + Commission based on turnover] = 12% of [Rs 1,20,000 + (50% × Rs 96,000) + Rs 5,000] = 12% of Rs 1,73,000 = Rs 20,760