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Treatment of Provident Funds (PF) for Salary Income

 

To encourage savings for the social security of employees, the Government has set up various kinds of provident funds. The employee contributes a fixed percentage of his salary towards these funds and in many cases employer also contributes. The whole contribution along with interest is credited to employee’s account. He will get payment out of this fund at the time of retirement and at some other important occasions. If the employee dies, his heirs will get the full payment.

            Provident Funds are of four kinds

            (i)        Statutory Provident Fund or the Fund to which the Act of 1925 applies (S.P.F.).
            (ii)       Recognised Provident Fund (R.P.F.).
            (iii)     Unrecognised Provident Fund (U.R.P.F.).
            (iv)      Public Provident Fund (P.P.F.).

TREATMENT OF PROVIDENT FUNDS

Particulars

Fund governed by P.F. Act 1925(S.P.F.) (For Govt. or Semi Govt. Employees)

Recognised Provident Fund (R.P.F.) (For Private Sector)

Unrecognised P.F. (U.R.P.F.) (For Private Sector)

1.

Employee’s own contribution,

Fully qualifies for deduction u/s 80C

Fully qualifies for deduction u/s 80C

Does not qualify for deduction u/s 80C

2.

Employer’s contribution

Fully exempted

It is deemed to be received by employee. Excess of Employer’s contribution to R.P.F. over 12% of salary is taxable

Ignore for the time being.

3.


Interest credited to Accumulated Balance,

.
Fully exempted

.
Exempted upto rate prescribed by the Government. Excess over this amount is taxable (i.e. 9.5%)

Ignore for the time being.

4.

Refund/Transferred Balance of U.R.P.F. to R.P.F.

Fully exempted

Exempted in all cases except when employee leaves service of his own accord before completion of 5 years’ continuous service. In such case the amount which has not been charged to tax is added in salary

In case of refund taxable portion’ is added in salary income of the year [Entitled to relief u/s 89(1)1. In case transferred balance amount which would have been taxable had the fund been RPF is added in salary

1. Taxable Portion = Employer’s contribution + Interest on this part. Interest on employee’s own contribution is taxable under the head Income from Other Sources.

            (a)       Statutory Provident Fund. Statutory provident fund is the oldest type of fund. It was started in the year 1925 through a Provident Fund Act of 1925. This fund was started with a view of promoting savings amongst government employees. Generally, this fund is maintained by Government or Semi-Government Departments like Railways, Reserve Bank of India, Colleges, Universities, local bodies, insurance companies, etc.

            The employer’s contribution towards the employee’s statutory provident fund and the amount of interest earned on the accumulated balance to the employee’s credit balance are not to be included in the income of employee and so it is ignored.

            When the employee retires or leaves the service and receives any amount from the accumulated balance to his credit in the statutory provident fund, the amount so received will not be included in employee’s total income [Section 10(11)] being exempted income.

            The employee’s own contribution will qualify for deduction u/s 80C.

            (b)       Recognised Provident Fund. As the name suggests, it is a fund to which the Commissioner of Income-tax has given the recognition as required under the Income-tax Act. Generally this fund is maintained by industrial undertakings, business houses, banks, etc.

The employer’s contribution over and above 12% of employee’s salary, will be included in employee’s salary income for tax purposes.

The employee’s contribution towards this fund will fully qualify for deduction u/s 80C

Interest on Provident Fund credit balance upto prescribed rate (9.5%) is exempted, but interest credited over and above such rate is deemed to be employee’s salary income and is included in salary income of that previous year.

            (c) Unrecognised Provident Fund. It is the provident fund which is not recognised by the Commissioner of Income-tax. The employee and the employer both contribute towards this fund.

The employee’s contribution is added in this salary (if ‘net salary’ or ‘salary after deduction of’ is given) and he will not be allowed any deduction u/s 80C regarding this contribution while computing the total income of the employee.

The employer’s contribution and interest on the accumulated credit balance of the fund are not to be included in employee’s salary income from year to year.
A payment received out of this fund is taxable so far it represents the employer’s contribution and interest thereon. The employee is entitled to relief under section 89(1). [The employee’s contribution is ignored because it was taxed when it was contributed]. Interest on the employee’s own contribution will be taxable as ‘Income from Other Sources’ and not as salary income.

Transferred balance. When the unrecognised provident fund is recognised for the first time, the credit balance in the employee’s unrecognised provident fund is transferred to the recognised provident fund account. This balance is known as transferred balance. In such case fund will be treated as RPF from the day of its inception and exemption will be allowed in same manner. Only excess of amount transferred to RPF over exempted, amount shall form taxable portion of transferred balance.

            (d) Public Provident Fund. So far all these funds were for the salaried people. On July 1, 1968 a new fund known as public provident fund was started so that self-employed people may also enjoy the benefit of deduction u/s 80C. Self-employed people are doctors, lawyers, accountants, actors, traders, pensioners. This fund can suit all types of pockets and its working is also very simple. The interested people can open their account in State Bank of India and its subsidiaries. The subscription can be between ` 500 and ` 1,00,000 in one year. At one time one can deposit in multiples of 50 and in one month only one deposit is possible and in the year minimum subscription should be ` 500 and the maximum ` 1,00,000.

Full withdrawal is possible after 15 years but in case of death of the subscriber full repayment will be made to the legal heir of nominee. Partial withdrawal and loans are also possible.

The subscription towards this type of fund is eligible for rebate in the similar manner, as in the case of statutory provident fund. Interest credited in this account is fully exempted.

Balances in the public provident fund are not liable to attachment by any court.

 
More.. Topics ... @ ' SALARY'
Salary-Definition & Meaning

Computation of Salary Income

Definition of Word ‘Salary’ [ Section 17(1)]

Section-15 : List of Incomes Chargeable to Income Tax under the head ‘ SALARIES’

Important Points / Characteristics for Computing Salary Income

Provident Fund

Treatment of Provident Funds (PF) for Computing Salary Income

Taxable Portion of annual accretion to RPF [Section 17(1)(vii)]. for Computing Salary Income

Transferred Balance from URPF to RPF [Section 17(1)(vii] for Computing Salary Income

Refund from Provident Fund [Section 17(3)(ii)] for Computing Salary Income

New Pension Scheme [ NPS] for Central Government and other Employees joining new jobs on or after 1-1-2004 for Computing Salary Income

 
Allowance [ Section 17(3)]

Allowance [ Section 17(3)] – for Computing ‘Salary’ Income

Fully Exempted Allowances for Computing ‘Salary’ Income

Fully Taxable Allowances for Computing ‘Salary’ Income

House Rent Allowance (HRA) for Computing ‘Salary’ Income

Allowances covered u/s 10 (14) for Computing ‘Salary’ Income

Meaning Of Salary For Different Purposes
PERQUISITES [Section 17(2)]

Meaning and Types of Perquisites [ Section 17(2)]

Taxability of Perquisites for Computing Salary Income

Perks Exempted From Tax for all Employees and not added in Salary Income

Rent Free House [Section 17(2)(i) Rule 3(1)]

Rules Regarding Calculation Of Value Of Rent Free House

Valuation Of Rent Free Accomodation (Unfurnished & Furnished)

Valuation of Rent Free Accommodation Provided as Concessional Rent [Sec. 17(2)ii)]

Obligation of Employee of Rent Free House met by Employer [Section 17(2)(iv)]

Sum payable by the Employer directly or through a fund to effect an assurance / an annuity [Section 17(2)(v)]

Any specified security or sweat equity shares allotted or transferred to employee [Section 17(2)(vi)] [ w.e.f. 1-4-2009]

Contribution to an Approved Superannuation Fund by the Employer [Sec. 17(2)(vii)]

Interest free or Concessional loan from employer [Rule 3(7)(i)]

Valuation of Perk in respect of Travelling, Touring, Accommodation

Food or Beverages Facility by Employer to Employee

Valuation of Perquisite in respect of Gift Voucher or Token

Valuation of Perquisite in respect of Credit Card

Valuation of Perquisite in respect of Club Facility

Use of Moveable Assets by Employer to Employee

Transfer Of Moveable Assets to the employee

Meaning of Specified Employee for Taxable Perquisites [Section 17(2)(iii) Rule 3]

Valuation of Perquisite of Motor Car or any Other Automotive Conveyance [Rule 3(2)]

Perquisite of Free domestic servants [Rule 3(3)]

Perquisite in respect of free supply of gas, electric energy, water supply [Rule 3(4)]

Free Educational Facilities to Children of Employee’s Household [Rule 3(5)]

Facility of Free or Concessional Private Journey to an employee by the employer engaged in the carriage of passengers or goods [Rule 3(6)]
PROFITS IN LIEU OF SALARY [17(3)]

Receipts treated as Profit in Lieu of Salary [ Section 17(3)]

Leave Travel Concessional (LTC) Assistance [Section 10(5)]

Death-Cum-Retirement Gratuity [Section 10(10)]

Non-Government employees receiving gratuity under payment of Gratuity Act, 1972 [POGA]

Non-Government Employees receiving gratuity (Not covered under payment of Gratuity Act)

PENSION [Monthly and Commuted] for Computing Salary Income

Leave Encashment [Section 10(10AA)] for Computing Salary Income

Any amount received as compensation on termination of employment [Section-10B]

Any amount received on voluntary retirement [Section 10(10C)]

Payment received from Recognised Provident Fund [Section 10(12)]

Any payment from Superannuation Fund [Section 10(13)]

 
DEDUCTIONS OUT OF GROSS SALARY [ Section-16]

Entertainment Allowance to Government Employees [Section-16(ii)]

Tax on Employment Under Section - 16(iii)

 
DEDUCTIONS U/S 80C OUT OF GROSS TOTAL INCOME

Section - 80C : Deductions from Gross Total Income (GTI) in case of Individual and HUF

Qualifying Amount ( Q.A.) for Deduction U/s 80C

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