Provident Fund Types
A person can use a variety of provident fund types for regular retirement savings or investments. They are as follows: [1]
The Provident Funds Act of 1952 established the Statutory Provident Fund. It is intended for government workers, academic institutions, accredited schools, railways, etc. The General Provident Fund (GPF) is another name for it. Periodically, the government raises the general provident fund interest rates. Employees of the private sector are not permitted to make contributions to the general provident fund. [1]
Recognized Provident Fund:
All businesses with 20 or more employees are subject to the Provident Fund Act, 1952 (PF Act). Establishments covered by the program have the option of establishing their own PF scheme by creating a trust or joining the government-approved program. As an alternative, the employer and employee of the organization may establish a provident fund plan by establishing a trust, in which case the monies are invested in accordance with the guidelines established by the PF Act, 1952. The trust or plan must be approved by the income tax commissioner in order to be recognized as a provident fund. [1]
Unrecognized Provident Fund:
A provident fund scheme is considered unrecognized if the
income tax commissioner does not approve the plan that was established by the employer and employee (as previously stated). Only recognized PFs are eligible for some tax incentives. [1]
The Public Provident Fund
was created for the general people, as the name implies. By
creating a public provident fund account with the approved bank, anyone can make contributions to
this program. An individual may deposit between Rs. 500 and Rs. 1,50,000 annually. After 15 years have passed, the PPF corpus may be completely withdrawn. [1]
Provident Fund for Employees (EPF)
One popular provident fund plan is the Employees' Provident Fund, or EPF. You must also be aware that this plan is being addressed in relation to salary-related issues. Organizations in the private sector with 20 or more employees have embraced it. [1]
Your EPF balance earns interest at the rate set for the year. For FY2024-25, this rate is set at 8.25% per annum. Check your returns using the EPF Calculator. [1]
Both the employer and the employee contribute monthly, typically in equal amounts, to the employee's account under the EPF plan. The employee's pay determines the precise percentage of contributions and the accounts to which they are assigned. [1]
The distribution of EPF contributions for people earning ₹15,000 or less is as follows: [1]
Employees contribute 12% of their base pay plus dearness allowance to the Employee Provident Fund (EPF). [1]
The employer contributes 3.67% of the basic salary plus the dearness allowance to the EPF. [1] 8.33% of the basic salary plus dearness allowance is the employer's contribution to the Employee Pension Scheme (EPS). [1]
Any excess contributions will be invested in EPF since the ceiling amount is Rs. 1,250 per month. It should be mentioned that the money paid to EPS does not earn interest. [1] With this allocation, the employer contributes 8.33% (up to Rs. 1,250) to the EPS and 3.67% to the EPF, ensuring that 12% of the employee's salary goes towards the EPF. [1]
Different Provident Fund Types and Their Tax Treatment
Statutory Provident Fund Account:
[1]
Particulars
| Provision for Income Tax
|
|---|
Contribution to the Fund by Employees
| Section 80C permits deductions
|
Contribution of the Employer to the Fund
| Not subject to taxes
|
Interest Income
| Tax-exempt, see the amendment
|
On Retirement
| According to the modification, an employee's lump sum payment is exempt from certain requirements.
|
Amendment:
Effective April 1, 2021, interest earned on contributions made to the Statutory Provident Fund Account exceeding Rs. 2.5 lakhs in a single year (apart from employer contributions) will no longer be exempt; instead, it will be taxable, and tax will be due on the interest income upon withdrawal of a lump sum amount. [1]
The annual cap is maintained at Rs. 5 lakhs if the employer does not make contributions to the Statutory Provident Fund. The interest on the excess contribution will not be deductible if it exceeds Rs. 5 lakhs, and tax would be due on that interest income upon the lump sum amount's withdrawal. [1]
Recognised Provident Fund Account
[1]
Particulars
| Provision for Income Tax
|
|---|
Contribution to the Fund by Employees
| Section 80C permits deductions
|
Contribution of the Employer to the Fund
| Exempt from BS (Basic Salary) + DA (Dearness Allowance) up to 12%
|
Interest Income
| Exempt up to 9.5% interest per annum
|
On Retirement, for any of the reasons listed below:
because of poor health, to transfer the remaining funds to a new employer, or
Due to retirement following five years of service or the employer's business closing
| Employees who get a lump sum payment are exempt.
|
Upon retiring before completing five years of service for any other reason not specifically listed above
| The received lump sum is subject to taxes.
The employer's contribution and interest income exemption will be taken away.
|
Amendment:
As of April 1, 2021, interest earned on contributions made to the Recognised Provident Fund Account exceeding Rs. 2.5 lakhs in a single year by individuals other than the employer will no longer be exempt; instead, it will be taxable, and tax will be due on the interest income upon withdrawal of the lump sum amount. [1]
The annual cap is maintained at Rs. 5 lakhs if the employer makes no contributions to the Recognized Provident Fund. Interest on excess contributions over Rs. 5 lakhs would not be deductible, and tax on such interest income will be due at the time of lump sum withdrawal. [1]
Not Recognized Provident Fund Account
[1]
Particulars
| Provision for Income Tax
|
|---|
Contribution to the Fund by Employees
| Section 80C does not permit deductions
|
Contribution of the Employer to the Fund
| Not subject to taxes at the time of the initial contribution
|
Interest Income
| Exempt from annual accrual taxes
|
Sums obtained upon retiring
| Taxability
|
Contribution of employees
| Non-taxable
|
Interest in the contribution of the employee
| Taxable under the title "Income from Other Sources"
|
The contribution of the employer
| Subject to taxes under the Salary heading
|
Interest on the contribution from the employer
| Subject to taxes under the Salary heading
|
Conclusion
Understanding the tax implications of different provident fund accounts is crucial for effective financial planning. Each type of provident fund has distinct tax treatments for contributions, interest earned, and withdrawals. While certain contributions and interest income enjoy tax exemptions, recent amendments have introduced taxable thresholds. Properly managing provident fund contributions not only ensures retirement savings but also helps in optimizing tax liabilities.
FAQs
What is Employees’ Provident Fund Scheme?
A plan that allows workers to save or build up retirement money. [1]
What is Employees’ Pension Fund Scheme?
A plan in which an employee receives a monthly pension upon retirement. [1]
Does the withdrawal of the EPF balance incur any TDS?
Yes, if PF is withdrawn before five years of employment, 10% tax is withheld at the source. However, no TDS is withheld if the withdrawal amount is less than Rs. 50,000. [1]
If I change jobs, what will happen to my PF balance?
Following certain procedures, the balance of the PF account is also moved to a scheme account that is kept by the new employer. [1]
What is the maximum annual contribution allowed for the Public Provident Fund (PPF)?
An individual can deposit between Rs. 500 and Rs. 1,50,000 annually in a Public Provident Fund account. [1]
Is interest earned on EPF contributions taxable?
Yes, effective April 1, 2021, interest earned on EPF contributions exceeding Rs. 2.5 lakhs in a financial year is taxable. [1]
Are private sector employees allowed to contribute to the General Provident Fund (GPF)?
No, private sector employees are not permitted to contribute to the General Provident Fund (GPF). It is only for government employees. [1]
What happens if an employee retires before completing five years of service under a Recognized Provident Fund?
If an employee retires before five years of service for reasons not listed under exemptions, the lump sum received becomes taxable.[1]
Is interest earned on an Unrecognized Provident Fund tax-exempt?
No, interest earned on an Unrecognized Provident Fund is taxable under the "Income from Other Sources" heading. [1]
An ISO 9001:2015 
