Clarification on taxability of withdrawal of accumulated balance in the provident fund



The section under discussion:

Section 10 (11)
Section 10 (12)

Rule 8 of Part A of the fourth schedule

Extract of above section from the Income Tax Act, 1961:

10 (11) any payment from a provident fund to which tmhe Provident Funds Act, 1925 (19 of 1925), applies or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette;

10 (12) the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule ;

Rule 8. The accumulated balance due and becoming payable to an employee participating in a recognised provident fund shall be excluded from the computation of his total income—

(i) if he has rendered continuous service with his employer for a period of five years or more, or

(ii) if, though he has not rendered such continuous service,

the service has been terminated by reason of the employee's ill-health, or by the contraction or discontinuance of the employer's business or other cause beyond the control of the employee.

  • Recognized Provident fund: is any fund created by the employer for the employees working in his establishment and has been approved by the commissioner of income tax.
  • Provident fund set up by the Central government is nothing but the Employee Provident scheme.1952.

Comment:

In finance bill 2016 the amendment is made to the section 10(12) by inserting the proviso as follows

Provided that nothing contained in this clause shall apply in respect of any amount of accumulated balance, attributable to any contributions made on or after the 1st day of April, 2016 by an employee other than an excluded employee, exceeding forty per cent. of such accumulated balance due and payable in accordance with provisions of rule 8 of Part A of the Fourth Schedule.

Explanation.—For the purposes of this clause, the term “excluded employee” means  an employee whose monthly salary does not exceed such amount, as may be prescribed;’;

On considering above:

Since the section 10 (12) talks only about recognised provident fund (not on provident fund set up by the CG and notified in gazette), any payment received by an employee from EPF account of central government is continues to be exempted.

Meaning: the employees having their account under employee provident fund scheme,1952 set up by the central government (most commonly and generally employer opts  to have under the scheme), the amendment made in the finance bill 2016 doesn’t change their benefit of getting exemption on withdrawal of the accumulated balance in the provident fund account. 


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About the Author

Chartered Accountant

CA Dhruva K S (Membership No. 243750) Chartered Accountant | Business Advisor | Tax Compliance Expert (91) 91104 39578 | dhruva @ caksd.com / dhruva @ sthayinllp.com Kengeri Upanagar, Bangalore, India CA Dhruva K S is a practicing Chartered Accountant based in Bengaluru, India, with over seven years of expertise ... Read more

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