Tax on PF withdrawl

Kinds of PF and its tax treatment:
There are 3 types of PF schemes provided by the employer, namely Statutory PF, Recognised PF and Unrecognised PF.
However, an employee may also contribute to the Public Provident Fund scheme.

Statutory PF:
This fund set up under Provident Fund Act, 1925 is mainly meant for Govt and semi Govt employees, university/educational institutions etc.
Taxability:
Employee’s contribution: eligible for rebate u/s 88.
Employer’s contribution: Fully exempt from tax.
Interest on PF: fully exempt from tax
Repayment: fully exempt from tax u/s10 (11)

Recognised PF:
It is a scheme to which the Employee’s Provident Funds and Miscellaneous Provisions
Act, 1952 applies. According to this Act, any establishment, which employs 20 or more persons, is obligated to register under the Act and start a PF scheme for the employees in the organisation. Such scheme has to be approved by the Provident Fund Commissioner as well as the Commissioner of the Income Tax.

Taxability:
Employee’s contribution: rebate u/s 88 is available
Employer’s contribution: exempt up to 12% of salary, excess of 12% to be included in gross salary.
Interest on PF: exempt u/s 10 up to 9.5% p.a Interest credited in excess of 9.5% to be included in gross salary.
Repayment: exempt in the following cases:

1. In the case of an employee who has rendered continuous service with his employer for a period of 5 years or more, or 
   
2. In the case of an employee whose service has been terminated by reason of ill health of the employee or due to the discontinuance of the employer’s business or other cause beyond the control of the employee. 
   
3. In the case of an employee who obtains employment with another employer who maintains any RPF to which the accumulated balance becoming due and payable is transferred.

In all other cases, where repayment is made, an employee will be liable to be taxed on the earlier exempted amount. Even the employer contribution and interest accumulated on the entire amount shall be taxed to income under the respective heads of income.

Unrecognised PF:
A scheme started by an employer not approved by the Commissioner of Income Tax is called as an URPF.
Taxability:
Employee’s contribution: No rebate u/s 88 is available.
Employer’s contribution: not taxable at the time of contribution
Interest on employer’s contribution: not taxable at the time of credit
Repayment: Accumulated employee’s contribution is not taxable
Interest on employee’s contribution till date is taxable as income from 
Other sources.
Employer’s contribution+ interest on such contribution
is taxable as profit in lieu of salary.

An employee in a government sector need not bother about the PF scheme as in all cases it is a statutory PF and hence exempt from tax. Where as an employee and an employer of a private sector concern have to ensure that their PF scheme is approved by the concerned Income Tax Official to get the eligible exemptions. Needless to say that a recognised PF scheme is the most common and immediate investment that strikes the mind of a middle class salaried person. 

Regards,

Devendra K

Thanks Devendra,

The point here is if completion of 5 years is must or part of year more than  6 months will be considered full year. Further, employment is little less than 5 years, but withdrawal is after around 6 years.

Another issue is - what is the status under the proposed new direct tax code. 

Rgds