Provident Fund (PF): Implication and Benefits

A Provident fund is a kind of retirement saving scheme. A part of the salary is put down in the Provident Fund account and is withdrawn at the time of retirement normally. It acts as long-term financial help. It is monitored by the EPFO (Employees’ Provident Fund Organization).

Types of Provident Fund and their Tax Implications: 

1. Statutory Provident Fund  

• It is a scheme set up with the Provident Funds Act, 1925.
• It is basically administered by the Government and Semi-government organizations, local authorities, universities, educational institutions, or railways

Tax implication 

• Employer’s contribution to PF account- Fully Released in the hands of the employee.
• Employee’s contribution to PF account- Allowed as a subtraction under section 80C of the Income-tax Act, 1961.
• Interest credited to PF account- Fully released in the hands of the employee.
• Payment received by the employee at the retirement time or termination of service- Fully released in the hands of the employee.

2. Recognized Provident Fund 

• Organizations with more than 20 employees contribute to this PF account generally.
• Organizations can either join the PF scheme set up under the Government or the PF trust self-created by the employer. But, all the PF schemes should be approved by CIT.
• An employee can also provide more than 12% in this account voluntarily.

Tax implication 

• Employer’s contribution to PF account- Released only to the range of 12% of salary, in the hands of the employee.

[Salary= Basic Pay + Dearness Allowance + Turnover based commission].

• Employee’s contribution to PF account- Allowed as a subtraction under section 80C of the Income-tax Act, 1961
• Interest credited to PF account- Released only to the range of 9.5% rate of interest, in the hands of the employee.
• Payment received by the employee at the retirement or termination of service- Fully released in the hands of an employee, only if certain conditions are satisfied.

3. Unrecognized Provident Fund 

• This Provident Fund is not recognized by the Commissioner of Income Tax (CIT).

Tax implication 

• Employer’s contribution to PF account- Fully Released in the hands of the employee.
• Employee’s contribution to PF account- No subtraction is allowed under section 80C of the Income-tax Act, 1961.
• Interest credited to PF account- Fully released in the hands of an employee.
• Payment received by the employee at the time of retirement or termination of service – shall be taxed in two parts:
• Employee’s contribution is Released. Nonetheless, Interest on Employee’s contribution shall be taxed under “Income from Other Sources”.
• Employer’s contribution and Interest on the same shall be taxed as “Salary Income”.

4. Public Provident Fund 

• This Provident Fund was brought in by the National Savings Institute and guaranteed by the Central Government.
• It is applicable to Individuals.
• The time period for investment in this scheme is 15 years, i.e., the amount put down in the PPF account has a maturity period of 15 years from the end of the year in which the account was opened.
• After maturity, this account can be increased for any number of the block of 5 years.
• A minimum of ₹500/- and a maximum of ₹1,50,000/- can be deposited in this account in a year.
• The amount in the PPF account is not held to attachment under any order or order of a court of law, but Income Tax and other. Government authorities can tag the account for recovering tax dues.
• This is an essential account where employees deposit an amount for holding a tax deduction.

Tax implication 

• Employer’s contribution to PF account- There is no function of an employer with this scheme, employees provide to this account themselves
• Employee’s contribution to PF account- Allowed as a subtraction under section 80C of the Income-tax Act, 1961
• Interest credited to PF account- Fully released in the hands of the employee.
• Payment received by the employee at the retirement or termination of service- Fully released in the hands of the employee.

Benefits of the Provident Fund Scheme 

• It acts as an investment for future requirements and expands meeting retirement goals.
• It guarantees maturity amount plus interest upon retirement, resignation, or death. 
• It gives an opportunity for partial withdrawal for meeting certain particular expenses such as house construction, higher education, marriage, illness, etc.
• It gives tax benefits to employees for their contribution to the PF account as a deduction below Section 80C of the Income Tax Act, 1961.
• It guarantees lifelong pension for employees as some part of the employer’s contribution is directed towards the pension scheme.

Conclusion

Provident Fund Registration secures the future of the employees and their families in financial terms and therefore, this scheme should be used by them. Recognized Provident Fund Scheme and Public Provident Fund Scheme are basically selected by the individuals for their benefit.