Provident Funds – Types & Tax Implications

There are different types of Provident Funds (PFs) which can be used by an individual for investment and saving purposes. The Balance of Provident Fund account (PF A/c) consists of amount invested by employee (you), amount invested by your employer and interest received on the amount invested.

The rules related to subscription, withdrawal, and taxability of Provident Fund (PF) vary depending on the type of Provident Fund. Taxability of provident fund is much more complex because of separate conditions of taxability.

In this post, let us understand the types of Provident Funds and their Tax implications.

Types of Provident Funds : Tax Implications & Key Points

• Statutory Provident Fund (SPF / GPF)
  • These are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc.,
  • The contributions made by the employer are exempted from income taxes in the year in which contributions are made.
  • The contributions made by the employee can be claimed as tax deductions under section 80c.
  • Interest amount credited during the financial year is not treated as income and hence it is exempted from income tax.
  • The redemption amount at the time of retirement is exempted from tax.
  • If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.
• Recognized Provident Fund (RPF)
  • Any establishment (business entity) which employs 20 or more employees can join RPF. Most of the individuals (who are salaried) generally contribute to this type of Provident Fund. This is one of the popular types of Employees Provident Funds (EPF). (Organizations which employ less than 20 employees can also join RPF if the employer and employees want to do so)
  • The business entity can either join the Govt. scheme set up by the PF Commissioner (or) the employer himself can manage the scheme by creating a PF Trust. All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax (CIT).
  • Employer’s contribution in excess of 12% of salary is treated as income of the employee and is taxable. In excess of 12%, the contributions are taxable in the year of contribution.
  • Tax Deduction u/s. 80C is available for amount invested by the employee (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 taxable as ‘salary’ in the year in which it is accrued.
  • Accumulated funds redeemed by the employee at the time of retirement / resignation are exempt from tax if he/she continues the service for 5 years or more.
• Unrecognized Provident Fund (UPF)
  • These are not recognized by Commissioner of Income Tax.
  • Employer’s contribution is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free in the year of contribution.
  • Tax deduction under section 80c is not available on Employees contributions.
  • Interest earned is not treated as income in the year it is credited and hence not taxable in the year of accrual.
  • At the time of redemption / retirement, the employer’s contributions and interest thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.
• Public Provident Fund (PPF)
  • Under PPF any individual from public, whether is in employment or not may contribute to this fund.
  • The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh Rs. p.a. The amount is repayable after 15 years.
  • PPF can serve as an excellent retirement planning / savings tool, for those who do not come under any pension scheme.
  • The PPF offers tax benefit under section 8OC and the interest earned is also exempt from tax. All the eligible withdrawals are exempted from taxes.

(SPF, RPF & UPF are types of Employees Provident Funds – EPF ) (Photo Credit : rediff.com)

You may read other EPF related articles;

• Tax Implications of EPF, PPF & NPS Withdrawals (Full / Partial) & Maturity proceeds
• All you need to know about EPFO’s Universal Account Number (UAN)
• How to transfer your EPF funds online through OTCP & UAN Member Portal?
• How is interest calculated on EPF Account – Components & Illustration?
• How to track in-operative EPF account through EPFO’s online Helpdesk?
• EPFO SMS Service – Get your EPF A/c Balance as SMS