PROVIDENT FUND

A provident fund scheme is a plan designed to provide a worker with significant rewards upon retirement. In accordance with this plan, the employee's salary has a certain amount withheld as his contribution to the fund. Additionally, the employer often makes a similar contribution to the fund out of his own pocket.

Investments in approved securities are made using the employer and employee contributions. Additionally, any interest generated thereon is added to the employee's account. As a result, the following items make up the credit amount in an employee's provident fund account:

• employee’s contribution
• interest on employee’s contribution
• employer’s contribution
• 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.

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:

• Recognition of the fund
• Employee’s and employer’s contribution to the fund
• Treatment of accumulated balance etc.                                       

A fund constituted under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 will also be a Recognised Provident Fund.

Taxability

Employer’s Contribution: Contribution in excess of 12% of salary is taxable as “Salary” u/s 17(1)

Employee’s Contribution: Eligible for deduction u/s 80C

Interest Credited on Employer’s Contribution: Amount in excess of 9.5% P.a. is taxable as “Salary” u/s 17(1)

Interest Credited on Employee’s Contribution: Amount in excess of 9.5% p.a. is taxable as “Salary” u/s 17(1)

Amount withdrawn on retirement / termination: Exempt u/s 10(12)

Unrecognised Provident Fund (URPF)

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.

Taxability

Employer’s Contribution: Not taxable at the time of contribution

Employee’s Contribution: Not eligible for deduction

Interest Credited on Employer’s Contribution: Not taxable at the time of credit of interest

Interest Credited on Employee’s Contribution: Not taxable at the time of credit of interest 

Amount withdrawn on retirement/ termination:  

• Employee’s contribution is not taxable.
• Interest on Employee’s contribution is taxable under ‘Income from Other Sources’
• Employer’s contribution and interest thereon is taxable as “Profit in lieu of salary” u/s 17(3).

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.

Taxability 

Employer’s Contribution: Fully exempt

Employee’s Contribution: Eligible for deduction u/s 80C

Interest Credited on Employer’s Contribution: Fully exempt

Interest Credited on Employee’s Contribution: Exempt upto certain limit of contribution

Amount withdrawn on retirement/ termination: Exempt u/s 10(11)

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 500 in a year. The maximum amount that may qualify for deduction on this account is 1,50,000 as per PPF rules.

A member of PPF may deposit his contribution in as many installments in multiples of 500 as is convenient to him. 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.

Taxability 

Employee’s Contribution: Eligible for deduction u/s 80C

Interest Credited on Employee’s Contribution: Fully exempt

Amount withdrawn on retirement/ termination: Fully exempt u/s  10(11)

As per section 10(11), any payment from a Provident Fund (PF) to which Provident Fund Act, 1925, applies or from Public Provident Fund would be exempt.

Accumulated balance due and becoming payable to an employee participating in a Recognized Provident Fund (RPF) would be exempt under section 10(12).

However, the exemption under section 10(11) or 10(12) would not be available in respect of income by way of interest accrued during the previous year to the extent it relates to the amount or the aggregate of amounts of contribution made by that person/employee exceeding 2,50,000 in any previous year in that fund, on or after 1st April, 2021 and computed in prescribed manner.

If the contribution by such person/employee is in a fund in which there is no employer’s contribution, then, a higher limit of 5,00,000 would be applicable for such contribution, and interest accrued in any previous year in that fund, on or after 1st April, 2021 would be exempt upto that limit.

It may be noted that interest accrued on contribution to such funds upto 31st March, 2021 would be exempt without any limit, even if the accrual of income is after that date.

The CBDT has, vide Rule 9D, notified the manner to calculate taxable interest relating to contribution in a provident fund or recognized provident fund, exceeding threshold limit.

Interest income accrued during the previous year which is not exempt from inclusion in the total income of a person (taxable interest) shall be computed as the interest accrued during the previous year in the taxable contribution account.

For this purpose, separate accounts within the provident fund account shall be maintained during the previous year 2021-22 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person.

Yearly threshold limit is 5,00,000 if the contribution by such person/employee is in a fund in which there is no employer’s contribution and 2,50,000 in other cases.


                                             Exemption of Accumulated balance of RPF, payable to an employee 

Where the accumulated balance in RPF becomes taxable, the tax payable in each of the years would be computed as if the fund had been an Unrecognised Provident Fund and the difference in tax would be payable by the employee.

Note - 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.

ILLUSTRATION 1

Mr. Mohit is working in XYZ Ltd. and has given the details of his income for the P.Y.2021-22. You are required to compute his gross salary from the details given below: 

SOLUTION                                                                                                                        

Computation of Gross Salary of Mr. Mohit for the AY 2022-23

Note 1 -  Gratuity received during service is fully taxable

Note 2 -  Employers contribution to RPF is exempt up to 12% of salary.

i.e., 12% of [Basic Salary + Dearness Allowance forming part of retirement benefits + Commission based on turnover] = 12% of [ 1,44,000 + (50% × ` 1,08,000) +  6,000] = 12% of  2,04,000

=  24,480

Note 3 - Employee’s contribution to RPF is not taxable. It is eligible for deduction under section 80C.