The tax treatment of various items in case of different provident funds is as follows:
Payment from Statutory Provident Fund [Section 10(11)]
Statutory Provident Fund |
Employer’s Contribution |
Employer’s contribution to such fund is not treated as income of the employee |
Interest |
Interest credited to such fund is exempt in the hands of the employee. |
Amount received at the time of termination |
Lump sum amount received from such fund, at the time of termination of service is exempt in the hands of employees. |
Payment from Recognised Provident Fund [Section 10(12)]
The accumulated balance due and becoming payable to an employee participating in a recognised provident fund, is exempt to the extent provided in rule 8 of part A of the Fourth Schedule.
Recognised Provident Fund |
Employer’s Contribution |
Employer’s contribution to such fund, up to 12% of salary is not treated as income of the employee (see Note 1). |
Interest |
Interest credited to such fund up to 9.5% per annum is exempt in the hands of the employee, interest in excess of 9.5% is charged to tax in the hands of the employee. |
Amount received at the time of termination |
If certain conditions are satisfied, then lump sum amount received from such fund, at the time of termination of service, is exempt in the hands of employees. (see Note 2) |
Un-Recognised Provident Fund |
Employer’s Contribution |
Employer’s contribution to such fund is not treated as income of the employee. |
Interest |
Interest credited to such fund is exempt in the hands of the employees. |
Amount received at the time of termination |
(See note 3) |
Public Provident Fund |
Employer’s Contribution |
Employers do not contribute to such fund |
Interest |
Interest credited to such fund is exempt. |
Amount received at the time of termination |
Lump sum amount received from such fund at the time of termination of service is exempt from tax |
Notes:
1. Salary for this purpose will include basic salary, dearness allowance, if the terms of service so provide and commission based on fixed percentage of turnover achieved by the employee.
2. Accumulated balance paid from a recognised provident fund will be exempt from tax in following cases:
(a) If the employee has rendered a continuous service of 5 years or more. If the accumulated balance includes amount transferred from other recognised provident fund maintained by previous employer, then the period for which the employee rendered service to such previous employer shall also be included in computing the aforesaid period of 5 years.
(b) If the service of employee is terminated before the period of 5 years, due to his ill health or discontinuation of business of the employer or other reason beyond his control.
(c) If on retirement, the employee takes employment with any other employer and the balance due and payable to him is transferred to his individual account in any recognised fund maintained by such other employer, then the amount so transferred will not be charged to tax.
Except above situations, payment from a recognised provident fund will be charged to tax considering such fund as un-recognised from the beginning (See note 3 given below for tax treatment of un-recognised provident fund).
3. Treatment of payment (at the time of termination) from un-recognised provident fund:
Payment on termination will include 4 things, viz., employee's contribution and interest thereto and employer’s contribution and interest thereto, the tax treatment of such payment is as follows:
· Employee's contribution is not chargeable to tax; interest on employee contribution is taxed under the head “Income from other sources”.
· Employer's contribution and interest thereon are taxed as salary income, however, an employee can claim relief under section 89 in respect of such payment.
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