1. Employer's contribution and interest on provident fund in the case of unrecognized provident fund are not taxable in the year of contribution or credit of interest. However when the lump sum amount is received by the employee then it becomes taxable.
2. The accumulated balance due and becoming payable to an employee participating in a recognised provident fund shall be exempt in the following cases:
(i) If the employee has rendered continuous service with his employer for a period of 5 years or more, or
(ii) If, though he has not rendered such continuous service of 5 years, the service has been terminated
(a) by reason of such employee's ill health or
(b) by the contraction or discontinuance of the employer's business or
(c) or other cause beyond the control of the employee, or
(iii) If, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised fund maintained by such other employer.
However in a situation mentioned under clause (iii) above for calculating period of service for clause (i) and (ii) above the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall also be included.
3. If the accumulated balance due to an employee participating in a recognised provident fund is paid to him otherwise than in the circumstances referred to above, as for instance, in cases where the employee voluntarily resigns from the post before the completion of 5 years-service with the employer, the amount paid to the employee is brought within the ambit of taxation. In such cases, the employee is required to pay, in addition to normal tax payable by him, an amount equal to the difference between the aggregate tax which would have been payable by him if certain tax concession allowed to the employees participating in recognised provident fund had not been allowed to the employee in the years in which he made contribution to the fund and the aggregate tax actually paid by him for these years.
In other words tax relief or deduction allowed to the assessee shall be withdrawn.
Further, the total employer's contribution plus interest thereon, which was not taxed earlier, shall be taxable as profit in lieu of salary. He can however, claim relief in this regard under section 89. Further, interest on employee's contribution is taxable as income from other sources.
4. Salary, for the purpose of provident fund includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites. As per the Supreme Court decision, commission allowed as a fixed percentage of the turnover achieved by the employee, is also included in the basic salary.