Tax On Provident Funds

Provident Funds & Superannuation Funds [Section 10(11), 10(12) & 10(13)]

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What is Provident Fund?

"Provident Fund" refers to a trust, or an account or a fund, to which a fixed contribution is made periodically, not having interval more than one year, both by employer and employee, which is accumulated for the benefit of the employee and repayable to him on the day he ceases to be an employee.

There are several "Provident Fund" schemes as discussed below: -

  1. Statutory Provident Fund (SPF) refers to the Provident Fund formed under the Provident Fund Act, 1925. This fund is maintained by Government and Semi Government organisations, local authorities, railways, universities and recognised educational institutions.

  2. Public Provident Fund (PPF) is a scheme notified by the Central Government as Public Provident Fund Scheme, 1968 operated by the State Bank of India or its subsidiaries.

  3. Recognised Provident Fund (RPF) refers to the Provident Fund formed and operated by the employers not under any statute but on their own and approved by the Chief Commissioner of Income-tax or the Commissioner of Income-tax. Till such approval is accorded by the Chief Commissioner of Income-tax or Commissioner of Income-tax, the said Provident Fund would be treated as "Un-Recognised Provident Fund" (URPF).

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What is Superannuation Fund?

"Superannuation Fund" (SAF) refers to a fund to which the employer alone contributes, established with sole purpose of providing annuities for employees in the trade or undertaking on their retirement at, or after a specified age, or on their becoming incapacitated prior to such retirement, or for the widows, children or dependents of persons who are or have been such employees on death of those persons.

SAF, if approved by the Chief Commissioner of Income-tax or Commissioner of Income-tax, will be known as "Approved Superannuation Fund" (ASAF). However, the employee is also permitted to make contributions voluntarily.

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Tax on Provident Funds & various exemptions

The following table shows Tax on Provident Funds and the various exemptions/reliefs available to each of the funds: -

Particulars SPF/PPF RPF URPF
Employer's Contribution to the Fund Not Taxable Tax on Provident Funds is exempt to the extent of 12% of Salary (refer note 1 below) Not Taxable in the year of Contribution
Employee's Contribution to the Fund Deduction under section 80C available Deduction under section 80C available No Benefit Available
Interest Credited to the Fund Exempt Exempt up to 9.5% rate of Interest Not Taxable at the time of Credit
Lumpsum amount withdrawn from the Fund Exempt under section 10(11) Exempt under section 10(12) subject to Note 2 below. Taxable fully as per Note 3 below.

Notes given at the end of the page.

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Tax on SAFs & various exemptions

Particulars ASAF Other SAF
Employer's Contribution to the Fund Not Taxable up to Rs.1,00,000 per annum per employee Not Taxable
Employee's Contribution to the Fund Deduction under section 80C available No Benefit Available
Interest Credited to the Fund Exempt Not Taxable at the time of Credit
Lumpsum amount withdrawn from the Fund Exempt under section 10(13) subject to Note 4 below. Taxable as per Note 3.

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Notes for Tax on Provident Funds

  1. Tax on Provident Fund: The transferred balance in a recognised provident fund, to the extent provided in rule 11(4) of Part A of the Fourth Schedule, viz., the Assessing Officer shall, subject to such rules as the Board may make in this behalf, make a calculation of the aggregate of all sums comprised in a transferred balance which would have been liable to income-tax, if it has been recognised from the date of the institution of the fund, without regard to any tax which may have been paid on any sum, and such aggregate (if any) shall be deemed to be income received by the employee in the previous year in which the recognition of the fund takes effect and shall be included in the employee's total income for that previous year, and, for the purposes of assessment, the remainder of the transferred balance shall be disregarded, but no other exemption or relief, by way of refund or otherwise, shall be granted in respect of any sum comprised in such transferred balance.

    Any portion of the balance to the credit of an employee in the existing fund which is not transferred to the recognised fund shall be excluded from the accounts of the recognised fund and shall be liable to income-tax in accordance with the provisions of this Act.

  2. The accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund is exempt only under the following circumstances: -

    1. Tax on Provident Funds: In the case of an employee who has been in service for a continuous period of at least 5 years. In computing the aforesaid period of 5 years, if any amount has been transferred from a RPF of a former employer, then the period of service with the former employer is also to be taken into account.

    2. If he has not rendered service for a continuous period of 5 years, and if his retirement is due to his ill-health, contraction or discontinuance of the employer's business, other reasons beyond the control of the employee the amount of balance transferred on his cessation of employment, from RPF maintained by the former employer to the RPF maintained by the present employer.

  3. Tax on Provident Funds: Any payment made under the Unrecognised Provident Fund or Unapproved Superannuation Fund is taxable, as per section 17(3) read together with section 56, as under: -

    • To the extent of Employer's Contribution and Interest thereon, taxable as "Salaries".

    • To the extent of Employee's Contribution - not taxable.

    • To the extent of Interest on Employee's Contribution is taxable as "Income from Other Sources".

  4. Any payment made to the employee from an ASAF is exempt under section 10(13) only in the following circumstances: -

    • on the death of a beneficiary; or

    • to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement, or

    • by way of refund of contributions on his death of the beneficiary; or

    • by way of refund of contributions to an employee on his leaving the service in connection with which the fund is established otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement, to the extent to which such payment does not exceed the contributions made prior to the commencement of this Act and any interest thereon.

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