Provident fund is a type of retirement saving scheme. A portion of the salary is deposited in the Provident Fund account and is withdrawn at the time of retirement normally. It acts as long-term financial support. It is administered by the EPFO (Employees’ Provident Fund Organization).

In this article, we are going to discuss the various types of Provident Fund and their Implications to be considered while Filing Income Tax Return.

Types of Provident Fund and their Tax Implications: 

1. Statutory Provident Fund  

  • It is a scheme set up under the Provident Funds Act, 1925.
  • It is basically maintained by the Government and Semi-government organizations, local authorities, universities, educational institutions or railways

Tax implication 

  • Employer’s contribution to PF account- Fully Exempt in the hands of the employee.
  • Employee’s contribution to PF account- Allowed as a deduction under section 80C of the Income-tax Act, 1961.
  • Interest credited to PF account- Fully exempt in the hands of the employee.
  • Payment received by the employee at the time of retirement or termination of service- Fully exempt in the hands of the employee.

2. Recognized Provident Fund 

  • Entities with more than 20 employees contribute to this PF account generally.
  • Entities can either join the PF scheme set up by the Government or the PF trust self-created by the employer. But, all the PF schemes must be approved by the Commissioner of Income Tax (CIT).
  • An employee can also contribute more than 12% in this account voluntarily.

Tax implication 

  • Employer’s contribution to PF account- Exempt only to the extent of 12% of salary, in the hands of the employee.

[Salary= Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits) + Turnover based commission].

  • Employee’s contribution to PF account- Allowed as a deduction under section 80C of the Income-tax Act, 1961
  • Interest credited to PF account- Exempt only to the extent of 9.5% rate of interest, in the hands of the employee.
  • Payment received by the employee at the time of retirement or termination of service- Fully exempt in the hands of an employee, only if specified conditions are satisfied:

(i) Employee renders continuous service for a period of 5 years or more (including period served with the previous employer, where PF account is transferred to the current employer).

(ii) The employee has been terminated because of certain reasons which are beyond control like ill-health, discontinuation of business of the employer, etc.

3. Unrecognized Provident Fund 

  • This Provident Fund is not recognized by the Commissioner of Income Tax (CIT).

Tax implication 

  • Employer’s contribution to PF account- Fully Exempt in the hands of the employee.
  • Employee’s contribution to PF account- No deduction is allowed under section 80C of the Income-tax Act, 1961.
  • Interest credited to PF account- Fully exempt in the hands of an employee.
  • Payment received by the employee at the time of retirement or termination of service – shall be taxed in two parts:
    • Employee’s contribution is Exempt. However, Interest on Employee’s contribution shall be taxed under “Income from Other Sources”.
    • Employer’s contribution and Interest on the same shall be taxed as “Salary Income”.

4. Public Provident Fund 

  • This Provident Fund was introduced by the National Savings Institute.
  • It is guaranteed by the Central Government.
  • It is applicable to Individuals.
  • The duration for investment in this scheme is 15 years, i.e., the amount deposited in PPF account has a maturity period of 15 years from the end of the year in which the account was opened.
  • After maturity, this account can be extended for any number of the block of 5 years.
  • A minimum of ₹500/- and a maximum of ₹1,50,000/- can be deposited in this account in a year.
  • The amount in the PPF account is not subject to attachment under any order or decree of a court of law, but Income Tax and other. Government authorities can attach the account for recovering tax dues.
  • This is an important account where employees deposit an amount for claiming a tax deduction.

Tax implication 

  • Employer’s contribution to PF account- There is no role of an employer under this scheme, employees contribute to this account themselves
  • Employee’s contribution to PF account- Allowed as a deduction under section 80C of the Income-tax Act, 1961
  • Interest credited to PF account- Fully exempt in the hands of the employee.
  • Payment received by the employee at the time of retirement or termination of service- Fully exempt in the hands of the employee.

UAN or Universal Account Number- An important aspect of Employee Provident Fund 

  • It is a 12-digit number allotted to an employee who contributes to the Employee Provident Fund.
  • It is generated for each PF member by the EPFO.
  • It is a unique number and that’s why remains the same even at the time of change of job.
  • It helps in easy tracking of PF balance and PF claim status and also helps in easy transfer and withdrawal of claims, but activation is necessary for availing these services.
  • Services like Online passbook, SMS services for each deposit of contribution and Online KYC update can also be provided on the basis of UAN.

Benefits of the Provident Fund Scheme 

  1. It acts as an investment for future necessities and extends to meeting retirement goals.
  2. It guarantees maturity amount plus interest upon retirement, resignation or death. 
  3. It provides an opportunity for partial withdrawal for meeting certain specific expenses such as house construction, higher education, marriage, illness, etc.
  4. It provides tax benefits to employees for their contribution to the PF account as a deduction under Section 80C of the Income Tax Act, 1961.
  5. It guarantees lifelong pension for employees as some portion of the employer’s contribution is directed towards the pension scheme.

Conclusion: Provident Fund safeguards the future of the employees and their families in financial terms and therefore, this scheme should be adopted by them. Recognized Provident Fund Scheme and Public Provident Fund Scheme are basically chosen by the individuals for their benefit.