Provident Funds – Types, Tax Benefits
Provident Funds is one of the most loosely defined terms used by the taxpayer. At the macro level, except PPF, rest all types of provident funds are perceived as one and the same only. There are no efforts to educate the readers regarding the same. The tax treatment of different types of provident funds is different. For an investor/employee, the understanding of the types of provident funds is critical and important.
There are different types of Provident Funds (PFs) which can be used by an individual for investment and saving purposes. The Balance of Provident Fund account (PF A/c) consists of amount invested by employee (you), amount invested by your employer and interest received on the amount invested.
The rules related to subscription, withdrawal, and taxability of Provident Fund (PF) vary depending on the type of Provident Fund. Taxability of provident fund is much more complex because of separate conditions of taxability.
In this post, let us understand the types of Provident Funds and their Tax implications.
Types of Provident Funds
According to Income Tax Act, there are 4 types of provident funds namely
1. Statutory Provident Fund (SPF / GPF) :
These are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc., The contributions made by the employer are exempted from income taxes in the year in which contributions are made.
The contributions made by the employee can be claimed as tax deductions under section 80c. Interest amount credited during the financial year is not treated as income and hence it is exempted from income tax. The redemption amount at the time of retirement is exempted from tax.
If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.
2. Recognized Provident Fund:
It is also known as EPF or Employee Provident Fund. It is mainly for private sector employees. Any organization with 20 or more than 20 employees, It is mandatory to subscribe to Recognized Provident Fund. An organization with less than 20 employees can also join Recognized Provident Fund voluntarily but it is not mandatory.
Under this option, the organization has a choice to join either the Govt Scheme that is set up and run by the PF Commissioner. Alternatively, the organization can set up its own trust. Big organizations like Tata etc have set up their own trust. For example, TTSL PF trust is known as Tata Teleservices Provident Fund. The PF trust is maintained with the respective EPFO office. A trust can be set up only after 3 years of its establishment.
In either case, Besides PF commissioner, the organization has to seek approval from Income Tax Commissioner to set up/join the PF Scheme/Trust.
Also Read: How to Transfer PF Funds Easily to another PF Account Online
3. Un-recognized Provident Fund:
These are not recognized by Commissioner of Income Tax. Employer’s contribution is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free in the year of contribution. Tax deduction under section 80c is not available on Employees contributions.
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 under income from other sources.
4. Public Provident Fund:
Under PPF any individual from public, whether is in employment or not may contribute to this fund. The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh Rs. p.a. The amount is repayable after 15 years.
PPF can serve as an excellent retirement planning / savings tool, for those who do not come under any pension scheme. The PPF offers tax benefit under section 8OC and the interest earned is also exempt from tax. All the eligible withdrawals are exempted from taxes.
Tax Treatment 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 | Not taxable | Not taxable |
| Employee’s Contribution | Section 80C Deduction | No Section 80C deduction | Section 80C Deduction | Section 80C Deduction |
| Interest on PF | Any interest over and above 9.5% is added to Income from Salaries. Until 9.5% interest is exempt. | Not taxable | Exempt | Exempt |
| Amount withdrew at retirement time | Exempt subject to certain conditions*. | Contribution from employer and interest on that is taxable under the head Income from Salaries; Contribution by an employee is not taxable, and employee’s contribution interest is taxable under the head Income from Other Sources. | Exempt | Exempt |
Provident Fund is one of the most tax efficient investment options. It is beneficial for long term investment or goals. One of the operational issues is inoperative EPFO a/c. After the introduction of UAN, this issue is resolved, as an employee you can link the EPF a/c to UAN through the help of your employer.