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Discussion > Income Tax > Tax planning >

Tax Treatment of Provident Funds

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Chartered Accountant


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Posted On 21 June 2010 at 12:38 Report Abuse

Section 10(11) and 10(12) of the Act deal with exemption on payments from provident funds, while section 80C of the act deals with allowance of deductions on contributions to provident funds. The following are the types of provident funds.

Statutory provident fund

Statutory provident fund is set up under the provisions of the Provident Funds Act, 1925. This fund is maintained by Government and Semi-Government organizations, local authorities, railways, universities and recognized educational institutions.

Recognized Provident Fund

Recognised Provident fund is one which is recognized by the commissioner of income-tax is accordance with the rules contained in Part A of the Fourth Schedule tto the Income Tax Act. It includes a provident fund established under a scheme framed under the Employees Provident Funds Act, 1952. This fund is maintained by private sector organization.

Unrecognized provident fund

Unrecognized provident fund is the provident fund which is neither a statutory provident fund nor a recognized fund and which is also a public provident fund.

Public provident fund

Payment from Public Provident Fund is exempt from tax as per  notification No. 2430 dated 02-07-1968). See all about Public Provide Fund article.

Summarized table showing tax treatment of provident funds

 

  Statutory Provident Fund Recognised Provident Fund Unrecognised Providnt Fund Public Provident Fund
Employer’s contribution to provident fund Exempt from tax Exempt up to 12 per cent of salary. Excess of emplyer’s contribution over 12 per cent of salary is taxable Exempt from tax Employer does not contribute
Deduction u/s 80C employee’s contribution Available Available Not available Available
Interest credited to provident fund Exempt from tax Exempt from tax if rate of interest does not exceed the notified rate of interest (i.e. 9.5%). Excess of interest over the notified rate is, however, taxable Exempt from tax Exempt from Tax
Lump sum payment at the time of retirement or termination of service Exempt from tax Exempt from tax in some cases when not exempt total income of employee will be computed as if provident fund is an unrecognized fund from the beginning See Notes No.2 Exempt from tax

Notes:

1) Salary means basic pay, commission and dearness allowance and excludes all other allowances and perquisites.

2) Payment received in respect of emplyee’s own contribution is exempt from tax and interest on employee’s contribution is taxable under the head ‘Income from other sources. Balance is taxable under the head salaries. However, relief can be claimed.

3) Under section 10(12), the accumulated balance due to an employee participating in a recognised provident fund is exempt to the extent indicated under Rule 8 of Part A of the Fourth Schedule to the Act. This rule specifies that to avail the exemption.

  • the employee should have rendered continuous service with his employer for 5 years or more; or
  • if he has not rendered such service, it should have been terminated by reasons beyond his control; or
  • if he has found another employment, the balance due to him should have been transferred to his account in the recognised provident fund of the new employer.

In so far as the employer’s annual contribution to such a fund is concerned, it shall be deemed to be income and taxed under the head “salaries” in the hands of the employee.

  • if it exceeds 10% of the salary; or
  • if interest paid on the balance to the credit of the employee exceeds the rate notified by the Central Government. The Government had fixed the rate of interest at 12% w.e.f. 1.4.1986 for the purpose of this provision.

The employee’s own contributions to the extent of one-fifth of salary are eligible for tax relief u/s 88 with effect from the assessment year 1991-92 without any limit as to the amount of contribution. For these purposes (both for purposes of the employee’s as well as the employer’s contribution), the term ’salary’ includes dearness allowance if the conditions of service so provide but excludes all other allowances and perquisites


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