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Tax Treatment of Provident Fund (EPF)

Contribution is made in the Provident Fund for the employee's welfare by the employee and the employer. The deduction is available under section 80C.

 

Provident fund is a kind of security fund in which the employees contribute a part of their salary and the employer also contributes on behalf of their employees. Section 10(11) and 10(12) of the Income Tax Act defines the exemption on the amount added to the provident fund. Additionally, the amount allowed as a deduction on contributing to the provident fund is dealt in section 80C of the Income Tax Act. The types of provident funds are:

  1. Recognised Provident Fund (RPF) as recognised by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952. It applies to enterprises employing at least 20 employees.
  2. Unrecognised Provident Fund (UPF) is not recognised by the Commissioner of Income Tax. The employers and employees start these schemes.
  3. Public Provident Fund (PPF) under Public Provident Fund Act, 1968 is another system of contributing to the provident fund. Self-employed people can also take part in this scheme. A minimum contributing limit of Rs. 500 per annum and a maximum of Rs. 150000 per annum are set.
  4. Statutory Provident Fund (SPF) is meant for employees of Government or Universities or Educational Institutes affiliated to University.

Tax Treatment of Provident Fund

Particulars Recognised PF Unrecognised PFStatutory PFPublic 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

 

*Conditions:

  1. Employee leaves the job after five years of employment; or
  2. Where the service period is less than five years, the reason for termination is discontinuance of employer’s business or ill health; or
  3. The balance in RPF is reassigned to RPF with the new employer on re-employment.