Provident Fund : About Types, Taxation and Advantages of PF

By Dheeraj Agrawal, Communication Professional

Did you know that apart from EPF (Employees Provident Fund) and PPF (Public Provident Fund), there are two more Provident Funds? The other category of Provident Funds (PF) also serves the same purpose of long term investing but the tax treatment of each differ from each other. There are four different types of Provident Funds which can be used by an individual for investment and saving purposes. The rules related to subscription, withdrawal and taxability of different Provident Fund schemes vary. These depend on the type of Provident Fund which you are using. Lets first understand various types of Provident Funds and who can subscribe to them

1. Statutory Provident Fund or General Provident Fund (SPF/GPF)

The Government maintains SPF/GPF, Semi Govt bodies, Railways, Universities, Local Authorities etc. It means that SPF/GPF is for government employees or employees of Universities or Educational Institutes affiliated to University. Only employees working in such organizations’ can subscribe to SPF/GPF.

2.Recognized Provident Fund (RPF)

Recognized Provident Fund (RPF) is recognized by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952. Any business entity which has 20 or more employees can join RPF. Employees Provident Fund i.e. EPF is, in fact, an RPF. Most of the salaried individuals generally subscribe to the EPF. Though, organizations which have less than 20 employees can also join RPF, if the employer and employees want to do so. Also, the business entity can either join the Govt. scheme, i.e. EPF or the employer himself can manage the scheme by creating a PF Trust. The Commissioner must approve all Recognized Provident Fund Schemes of Income Tax.

3.Unrecognized Provident Fund (UPF)

These are not recognized by the Commissioner of Income Tax or Provident Fund Commissioner. The employers and employees start these schemes with their consent.

4.Public Provident Fund (PPF)

Unlike other Provident Fund schemes, PPF is open for all residents. Whether salaried or self-employed, anyone can take part in this scheme. A minimum of Rs.500 is required to open a PPF account, and the maximum that can be deposited is Rs.1.5 lakh. A deposit more than Rs. 1.50 lakh per annum will not earn any interest. Also, investment more than 1.5 lakh per annum will not be eligible for rebate under income tax. PPF can serve as an excellent retirement planning scheme for those who do not come under any pension scheme.

Difference between PPF and Other PF Schemes

There are some differences between PPF and other provident fund schemes, which you should know.

1. The individual needs to be salaried to be able to contribute to SPF/GPF, RPF or UPF. But PPF allows both self-employed and salaried individuals to contribute.

2. Only the individual contributes to the fund in a Public Provident Fund (PPF) account. But in other provident funds, both employer and employee can contribute.

3. In a Public provident fund, can’t withdraw the amount before the completion of 15 years. But in other types of provident fund schemes, the amount can be withdrawn before its completion when fulfilling specific conditions.

Tax Treatment of Various Provident Funds

There are various sections of the Income Tax Act which covers the tax treatment of the Provident Funds. These tax rules apply on subscription, interest earned and withdrawal of the amount in PF schemes. A few of these sections are Section 10(11), 10(12) and 80(C) of the Income Tax Act. We will go through the tax rules of these PF schemes one by one.

Tax Treatment of SPF/GPF

• The contributions made by the employer are not taxable in the year in which contributions are made.

• The employee’s contributions can be claimed as tax deductions under section 80(C) of the Income Tax Act.

• Interest amount credited during the financial year is exempted from income tax.

• The redemption amount at the time of retirement is also exempted from tax.

• If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.

Tax Treatment of RPF

• Employer’s contribution to 12% of salary is exempt. But if the contribution is more than 12% of salary, the excess amount is treated as income of the employee and is taxable.

• Employees’ contribution can be claimed as tax deduction under section 80(C) up to Rs 1.5 Lakh in a Financial Year.

• Interest amount earned (up to 9.5% interest rate) on PF balance (employee’s + employer’s contributions) is tax-free. In excess of 9.5%, the interest on contributions is added as income from salary.

• At the time of retirement, accumulated funds redeemed by the employee are exempt from tax.

• If the amount is withdrawn after the resignation (but before retirement), it will be exempt from tax subject to fulfilling certain conditions. These are: Employee leaves the job after 5 years of job; or she/he leaves the job because of discontinuance of employer’s business or her/his ill health.

Tax Treatment of UPF

• Employer’s contribution is not taxable in the year of investment.

• Employees contributions will not get tax deduction under section 80(C).

• Interest earned is also not taxable.

• At the time of redemption/retirement, the employer’s contributions and interest thereon are treated as ‘salary income’ and chargeable to tax. However, an employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.

Tax Treatment of PPF

• Subscriber’s contribution can be claimed as deduction under section 80(C) up to Rs. 1.5 lakh per annum.

• Interest earned on the subscription amount is exempt from income tax.

• Amount withdrawn at maturity is also exempt from income tax. Remember that you can’t withdraw the amount before completing 15 years. But if you want to remain invested, you can do so by extending the scheme in a block of 5 years.

After going through all these rules of tax treatment, we can rank the provident fund schemes in the following order. This ranking is according to the tax liability and ease of investment in these schemes.

1. SPF/GPF

2. RPF/EPF

3. PPF

4. UPF

My suggestion is that even if you do have any SPF or RPF or UPF, you must open a PPF account too, keeping in view your retirement. It is the best debt plan available in our country, which can help you to accumulate funds for your retiring years.