Taxability of Provident Fund - Statutory, Unrecognized/Recognized

Taxability of Provident fund– Statutory, Recognized, Unrecognized Provident Fund.

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Taxability of Provident fund– Statutory, Recognized, Unrecognized Provident Fund.

Balance of Provident Fund account consists of amount invested by employee, amount invested by employer and interest received on amount invested. Taxability of provident fund is much more complex because of separate conditions of taxability. Tax implications vary depending on provident fund, amount invested, interest received and lump sum payment received at the time of retirement. Below are the key highlights of the 3 types of Provident Funds with a focus on the tax  treatment:

  1. Statutory Provident Fund

a).  These are maintained by Govt., Semi Govt., Local Authorities, Railways, Universities etc.

b).  Employer’s contribution is not treated as income in the year in which contribution is made.

c).  Deduction u/s. 80C is available for amount invested by the employee.

d).  Interest on PF is not treated as income in the year in which it is credited.

e).  Accumulated funds redeemed by the employee at the time of retirement are exempt from tax.

f.)  Termination of the PF account by the employee is exempt from tax

  1. Recognized Provident Fund

a).  Any establishment with 20 or more employees is covered by PF Act. Establishment with less than 20 employees can join a Recognized Provident Fund if the employer and his employees want to do so.

b).  Employer’s contribution in excess of 12% of salary is treated as income of the employee.

c).  Deduction u/s. 80C is available for amount invested by the employee.

d).  Interest earned from interest rate of up to 9.5% is tax free.

e).  Accumulated funds redeemed by the employee at the time of retirement are exempt from tax if he continues his service for 5 years or more.

f.)  Termination of the PF account after a term of 5 years or more is exempt from tax.

  1. Unrecognized Provident Fund

a).  Unrecognized Provident Funds are not recognized by Commissioner of Income Tax.

b).  Employer’s contribution is not treated as income in the year of investment.

c).  Deduction u/s. 80C is not available for amount invested by the employee.

d).  Interest earned is not treated as income in the year it is credited.

e).  Lump sum amount is redeemed by the employee at the time of retirement. Following conditions are applicable while doing so:

i).         Employers contribution and interest thereon will be treated as Salary Income

ii).        Employees contribution will not be chargeable to tax

iii).       Interest on Employees contribution will be charged under income from other sources.

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