Taxation Rules of Contribution to Provident Fund and interest earned thereon
The basic rules of income tax regarding provident fund are as under:
- The contribution to provident fund by employee is eligible for deduction under section 80C. Employer’s contribution is not taken for deduction purpose.
- All payments by provident fund is tax free in case of Central/state provident fund.
- The contribution by employers in excess of 12 % recognized PF is taxable salary of the employee.
- The interest paid by recognized provident fund in excess of 9.5 % is also taxable income of the employee.
- In case an employee is member of unrecognized PF and when it is recognized by Commissioner of Income Tax, the accumulated balance is transferred to recognized PF. That amount which has been transferred from unrecognized to recognize is also taxable in hands of employees and added to gross income.
- If you are member of an unrecognized PF, the employer’s contribution is not taxable, but when it is paid to you, the amount pertaining to employers contribution paid (principal + interest) is taxed under the head “salary” as income in lieu of salary. The interest on employee’s contribution is taxed under income from other sources.
As mentioned above, both the employer and employee contribute towards Provident Fund. The contribution made by employees is out of their own income and therefore no question of taxation arises as the entire amount has already been taxed. The contribution by the employer is over and above salary of employee and therefore is seen as income of employee and taxed. The interest earned on the Provident Fund balance is on both employer as well as employee contributions, and this interest is also an income of employee and therefore taxed.
The detailed tax treatment of different kinds of provident funds is little technical. There are rules that govern whether a certain fund will be taxable or not, the technical details of which are shown here.
Tax treatment of Provident Fund can be discussed under two scenarios:
- One during continuity of job, and
- Upon receipt of accumulated balance of provident fund at the time of retirement or resignation
The table below shows the tax treatment of different kinds of provident funds:
During Continuity of Job
|Employee’s Contribution||Employer’s Contribution||Interest on Provident Fund||Repayment of sum on retirement, resignation or termination|
|RPF||Deduction under Section 80C is available.||Exempt upto 12% of Salary. Thus Contribution made by employer exceeding 12% shall be added to employee’s salary Income.||Exempt upto 9.5%. Interest exceeding 9.5% shall be added to employee’s Salary Income.||Nothing is taxable subject to following conditions:|
If none of the above conditions are satisfied then:
|URPF||No deduction under section 80C available||Any amount of contribution is not taxable||Not taxable||Sum received on retirement/ termination comprise of following:|
Employer’s Contribution and interest there on: Taxable as Salary Income.
|SPF||Deduction under Section 80C is available.||Fully Exempt||Fully Exempt||Fully Exempt|
|PPF||Assessee / Employee can make contribution to PPF, No concept of Employer’s Contribution. Deduction under section 80C available on contribution made.||Amount received (including interest) is Fully Exempt.|