Provident Funds & Types of Provident Fund (PF)

Types of Provident Fund

·       Statutory Provident Fund (SPF / GPF)

·       Statutory PF is maintained by government, Semi government, Railway, Universities, Local Authorities

·       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.

·       Recognized Provident Fund (RPF)

·       Any establishment (business entity) which employs 20 or more employees can join RPF.

·       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 

·       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.