Saturday, May 17, 2014

Income Under the Head Salaries: Types of Provident Funds and Its Taxability

Types of Provident Fund
At present there are 4 types of provident funds:

a) Statutory Provident Fund (SPF): This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.

b)   Recognized Provident Fund (RPF): This scheme is applicable to an organization which employs 20 or more employees. An organization can also voluntarily opt for this scheme. All RPF schemes must be approved by The Commissioner of Income Tax. Here the company can either opt for government approved scheme or the employer and employees can together start a PF scheme by forming a Trust. The Trust so created shall invest funds in specified manner. The income of the trust shall also be exempt from income taxes.

c)   Unrecognized Provident Fund (URPF): Such schemes are those that are started by employer and employees in an establishment, but are not approved by The Commissioner of Income Tax. Since they are not recognized, URPF schemes have a different tax treatment as compared to RPFs.

d)  Public Provident Fund (PPF): This is a scheme under Public Provident Fund Act 1968. In this scheme even self-employed persons can make a contribution. The minimum contribution is Rs.500 per annum and the maximum contribution is Rs.1, 00,000 per annum. The contribution made along with interest earned is repayable after 15 years, unless extended.


Taxability of Provident Funds
Particulars
SPF
RPF
URPF
PPF
1. Employee's/ assessee's contribution
Deduction u/s 80C is available from gross total income subject to the limit specified therein
Deduction u/s 80C is available from gross total income subject to the limit specified therein
No deduction u/s 80C is available
Deduction u/s 80C is available from gross total income subject to the limit specified therein
2.Employer's contribution
Fully exempt from tax
Exempt up to 12% of salary. Amount in excess of 12% is included in gross salary.
Not exempt but also not taxable every year. For taxability see point 4 below
Not applicable as there is only assessee's own contribution
3. Interest on Provident Fund
Fully exempt from tax
Exempt u/s 10 up to 9.5% p.a. Interest credited in excess of 9.5% p.a. is included in gross salary
Not exempt but also not taxable every year. For taxability see point 4 below
Fully exempt
4.Repayment of lump sum amount on retirement / resignation /termination
Fully exempt u/s 10(11)
Exempt if the employee has rendered minimum 5 years of continuous service
Accumulated employee's contribution is not taxable Accumulated employer's contribution + interest on employer's contribution (till date) is taxable as profit in lieu of salary. Interest on employees contribution (till date) is taxable as income from other sources
Fully exempt. u/s 10(11)

Transferred Balance of Provident Fund: The balance of unrecognised fund which is transferred to recognised fund is called transferred balance.
Points to remember:
Ø  The fund will be treated as RPF from the date fund was instituted
Ø  The employers contribution to URPF shall qualify for exemption upto 12% of salary and excess shall be taxable.
Ø  Interest upto 9.5% is exempted, excess taxable
Ø  Salary means: basic + DP + DA (Which enters) + Commission on turnover