Taxablity Exemption of Provident Funds

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 80 C.
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: Deduction u/s 80C 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 u/s 10(12) in the following cases:

Rule 8 of Part A of the Fourth Schedule;

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: Deduction u/s 80 C 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

Withdrawal of EPF (Formed under act of 1952)

Section 10

        (11)  any payment from a provident fund to which the 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];

        (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 of Part A of the Fourth Schedule;

Exclusion from total income of accumulated balance.

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, [or]

       [(iii)  if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer.

Explanation.—Where the accumulated balance due and becoming payable to an employee participating in a recognised provident fund maintained by his employer includes any amount transferred from his individual account in any other recognised provident fund or funds maintained by his former employer or employers, then, in computing the period of continuous service for the purposes of clause (i) or clause (ii) the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall be included.]

Tax on accumulated balance.

9.   (1) Where the accumulated balance due to an employee participating in a recognised provident fund is included in his total income owing to the provi-sions of rule 8 not being applicable, the [Assessing] Officer shall calculate the total of the various sums of [tax] which would have been payable by the emp-loyee in respect of his total income for each of the years concerned if the fund had not been a recognised provident fund, and the amount by which such total exceeds the total of all sums paid by or on behalf of such employee by way of tax for such years shall be payable by the employee in addition to any other [tax] for which he may be liable for the previous year in which the accumulated balance due to him becomes payable.

(2) Where the accumulated balance due to an employee participating in a recognised provident fund which is not included in his total income under the provisions of rule 8 becomes payable, an amount equal to the aggregate of the amounts of super-tax on annual accretions that would have been payable under section 58E of the Indian Income-tax Act, 1922 (11 of 1922), for any assessment year up to and including the assessment year 1932-33, if the Indian Income-tax (Second Amendment) Act, 1933 (18 of 1933), had come into force on the 15th day of March, 1930, shall be payable by the employee in addition to any other tax payable by him for the previous year in which such balance becomes payable.