Provident Fund in India, Its Taxability and TDS on Provident Fund

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Provident Fund in India, Its Taxability and TDS on Provident Fund

What is provident Fund(PF)?

Provident Fund is a retirement saving scheme in India which is similar to United State’s Social Security program. Its purpose is to provide financial support to members. To understand the scheme of provident fund, we can discuss it in two parts:

  1. Employees Provident Funds(EPF)

In Employees Provident Fund(EPF), workers must contribute a portion of their salaries and Employers also contribute a minimum sum as defined in law. The corpus so build is to provide financial support to workers as per law. EPF scheme is only for people who are in employment. EPF is governed by “THE EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952“.

Employees Provident Fund (EPF) is maintained by the Employees Provident Fund Organization (EPFO) of India. An establishment with 20 or more workers working in any one of the 180+ industries should register with EPFO. EPFO is a statutory body of the Indian Government under Labor and Employment Ministry. It is one of the largest social security organizations in the world in terms of members and volume of financial transactions undertaken.

  1. Public Provident Fund (PPF)

Public Provident Fund is a social security scheme for all people not only for employees but also for a person who is self employed, farmer, businessman etc. The Scheme is backed by Government of India to provide social security to all people. In this scheme, there is no contribution of employer, only a person opting for scheme have to contribute money over a period of time to earn attractive tax free interest. PPF Scheme is governed by “PUBLIC PROVIDENT FUND ACT 1968

What are types of Provident Fund?

As explained above Provident fund is of two types: EPF & PPF which are explained below along with their sub-parts:

  1. Employees Provident Funds(EPF)

  • Statutory Provident Fund(SPF): Statutory Provident Fund is the oldest type of Provident Fund set up in 1925 under Provident Fund Act 1925. This fund was started with a view of promoting saving amongst government employees. Generally this fund is maintained by  government, semi- government,  Railways, RBI, universities or other educational institutes which are affiliated to universities etc.

 

  • Recognized Provident Fund(RPF): Recognized Provident Fund 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 manner specified by law. The income of the trust shall also be exempt.Till Oct 2014 every employee had a  Provident Fund (PF) account number which was associated with the employer. Change of job meant another Provident Fund account number. It involved transferring of balance amount from one account number to another. Multiple account numbers have been a major area of concern as a majority of grievances of employees are related to transfer of funds from one account number to another.To address this problem EPFO has launched a Universal Account Number (UAN) driven Member Portal (https://unifiedportal-mem.epfindia.gov.in/memberinterface/) to provide a number of facilities to its members through a single window. Member has to activate his registration to avail various facilities such as UAN card download, member passbook download, updating KYC information, listing all his member ids to UAN, file and view transfer claim.The EPF interest rate of India is decided by the central government with the consultation of Central Board of trustees. In the past several decades, the interest rate has ranged from 8-12 % of the balances maintained in the fund.  The EPF interest rate notification is available on the official website of EPF India on an annual basis. EPF interest rate for 2015-16 is declared at 8.8% p.a.

 

  • Unrecognized Provident Fund(URPF): URPF are those schemes that are started by employer and employees in an establishment, but are not approved by The Commissioner of Income Tax. Hence this is called Unrecognized provident Fund.

 

  1. Public Provident Fund (PPF)

    As explained above PPF is governed by Public Provident Fund Act 1968. In this scheme even self-employed persons can make a contribution. Some important features of Public Provident Fund are as follows:

  • The minimum contribution is Rs. 500 per annum and the maximum contribution is Rs. 150,000 per annum.
  • The contribution made along with interest earned is repayable after 15 years which may be extended for a period of 5 years per extension.
  • In PPF account, annual contribution can be deposited in lump sum or in a maximum of 12 installments per year.
  • The government of India decides the rate of interest for PPF account. The current interest rate effective from 1 April 2016 is 8.1% p.a (compounded annually) which was revised from 8.70% effective from 1 April 2013.
  • PPF is a very good option to earn tax free income in long term as no tax is applicable on PPF account. Contribution to PPF account is eligible for deduction u/s 80C of Income Tax Act.
  • PPF funds can’t be attached under court order or laid claim to by creditors.
  • NRI, Foreigners and HUF cannot open PPF account.
  • PF accounts can be opened in authorized banks only. It is a government-run scheme, Government Fund rules apply irrespective of where the account is held. PPF account transfers can be effected between bank-branches.
  • PPF accounts cannot be closed before maturity i.e. before the end of year 15. Even if an account becomes inactive, funds accrued therein cannot be withdrawn until the end of the 15 year. On completing 15 years, the entire amount held in the account, along with the interest accrued, can be withdrawn freely and the account can be closed. However, if account holders are in need of funds, the scheme permits partial withdrawals from year 7 i.e. on completing 6 years. The amount that can be withdrawn is capped as the lower of: (i)50% of the total balance at the end of the fourth year, counting back from the year of withdrawal OR (ii) 50% of the total balance at the end of the year before the year of withdrawal Withdrawals can be made only once in a financial year.

Rate of Contribution to Employees Provident Fund

Minimum and Maximum limit of rate of contribution to Employees Provident Fund can be explained as below:

Contributor Minimum Maximum
Employee 12%/10%* of Basic+ DA 100% of Basic + DA
Employer# 12%/10%* of Basic + DA

Or

12%/10%* of Rs. 15000/-

(w.e.f 01-09-2014, earlier it was Rs. 6500/-)

Whichever is lower

(including EPS)

Any amount.

* rate of 10% is applicable only for

  • any establishment is which less than 20 employees are employed.
  • sick industrial unit.
  • establishment is which accumulated losses are equal to or exceeding its entire net worth.
  • establishment of jute, beedi, brick, coir and gaur gum industry.

# Employer’s contribution is divided as follows:

  • 8.33% goes to Employee’s Pension Scheme(EPS)
  • 3.67% goes to Employee’s Provident Fund(EPF).
  • 0.5% goes to Employee’s Deposit Linked Insurance Scheme(EDLI).
  • 0.85% goes for EPF Administrative charges.
  • 0.01% goes for EDLI Administrative charges.

Hence employer’s contribution comes to 13.36% in total.

Taxability of Provident Fund.

Taxability of Provident Fund in India, can be explained with the help of following table:

Stage/Fund SPF RPF URPF PPF
 

Employee Contribution / Self Contribution

Deduction under Section 80C is available

 

Deduction under Section 80C is available

 

No deduction available (No concept of employee and employer) Deduction under Section 80C is available for Self contribution to PPF.
Employer Contribution Fully Exempt Exempt upto 12% of Salary. Thus Contribution made by employer exceeding 12% shall be added to employee’s taxable salary Income

 

Not taxable at the time of contribution Not applicable
Interest on Provident Fund Fully Exempt Exempt upto 9.5%. Interest exceeding 9.5% shall be added to employee’s Taxable Salary Income.

 

Not taxable at this stage. Fully Exempt
Repayment on maturity i.e.  Retirement, resignation and termination Fully Exempt Nothing is taxable subject to following conditions:

  1. Employee left the job after five years of service OR
  2. Where Period of service less than 5 years, the termination is due to ill health, discontinuance of business of employer. OR
  3. here on re-employment, the balance in R.P.F is transferred to R.P.F with new employer. [For the purpose of computing 5 years period, Period of services rendered with previous employer shall also be included.]

If none of the above conditions are satisfied then:

  1. The amount not taxed earlier shall be taxed in the same manner as URPF, given below.
  2. Any tax concession (e.g. 80C) availed by assesses for contribution to RPF shall now be withdrawn.
Sum received on retirement/ termination comprise of following:

1.      Employer’s Contribution and interest there on: Taxable as Salary Income.

2.      Employee’s own Contribution : It is not taxable.

3.    Interest on employee’s contribution: Taxable as income from other sources.

Fully exempt

 

 

 

Taxability and TDS on Provident Fund (PF) Withdrawals

Taxability and TDS on Provident Fund can be summarized in following manner:

  1. Statutory Provident Fund and Public Provident Fund

  •  Nothing is taxable in case of Statutory Provident Fund and Public Provident Fund, Hence no question of TDS arise.
  1. Recognized Provident Fund

  • Employer Contribution above 12% is taxable as salary income.

(TDS on this part is deducted along with TDS on salary u/s 192)

  • Interest above 9.5% is taxable as salary income.

(TDS on this part is deducted along with TDS on salary u/s 192)

  • Withdrawal if made before completion of service period of 5 Year except the reason of termination due to ill health, discontinuance of business of employer, is taxable as follows: (i)Employer’s contribution and interest thereon is taxable as salary income. (ii) Interest on Employee’s Contribution is taxable as Income from other sources. (iii)Contribution made by Employee out of his salary income, for which deduction was allowed earlier u/s 80C, shall now be withdrawn Hence employees contribution will be taxed itself under salary income without any deduction.

(TDS on above taxable withdrawal from Recognized Provident Fund is introduced w.e.f 1st June 2015 by introducing new section 192A in Budget 2015. As per section 192A, TDS @ 10% is to be deducted if aggregate amount of withdrawal is Rs. 30000 or more. The Finance Act, 2016 has amended section 192A of Income Tax Act, 1961 to raise the threshold limit of PF withdrawal from Rs.30,000 to Rs.50,000 w.e.f 1st June 2016. TDS is deducted at the maximum marginal rate of 34.608% if a member fails to submit PAN. TDS shall not be deducted in following cases:

  • Transfer of PF from one account to another PF account.
  • Termination of service due to Ill health of member /discontinuation of Business by employer/completion of project/other cause beyond the control of member.
  • If employee withdraws PF after a period of five year.
  • If PF payment is less than Rs. 50,000/
  • If employee submits Form 15G/15H along with their PAN.)

 

3. Unrecognized Provident Fund

  • Noting is taxable unless any money is withdrawn from URPF.
  • Withdrawals from URPF is taxable as follows: (i)Employer’s contribution and interest thereon is taxable as salary income. (ii)Interest on Employee’s Contribution is taxable as Income from other sources. (iii)Contribution made by Employee out of his salary income, for which deduction was allowed earlier u/s 80C, shall now be withdrawn Hence employees contribution will be taxed itself under salary income without any deduction.

(Rule 8, 9 & 10 of Part A to Fourth Schedule and section 192A of Income tax Act 1961 describes that TDS on withdrawal is applicable in case of Recognized Provident Fund, Hence it can be said TDS is not applicable in case of withdrawal from Unrecognized provident Fund)

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