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Provident Fund In Indian Tax System

1. Statutory Provident fund under the Provident Fund Act, 1925 maintained by government and semigovernment organisations, local authorities, universities, recognised educational institutions, railways, air lines, etc. This is blue-eyed baby. everything is exempt from tax, without any ifs and buts, including the employer's contribution and the interest paid, even if it is over 12%.

2. Recognised Provident Fund(RPF) covered by Employee's Provident Fund and Miscellaneous Provisions Act, 1952 applicable to establishment with 20 or more employees. Those with fewer employees are also welcome to opt for it. The PF Commissioner manages the funds. However if the establishment desire to manage the funds. However, if the establishment to manage its own funds, a trust offered by the IT Commissionar, has tobe correct which will invest the funds in accordance with the PF rules. There have been significant change in this regard. The subject matter has been extensively covered in this site. Taxpayer to Taxsaver.

   Employee's contributions are coverd by Section 88, and there is no ceiling on his voluntary contribution. Employeer's contribution in excess of 12% of employer's salay as well as interest paid exceeding 9.5% per annum is charged to tax.

   Payment of accumulated balance in RPF is taxable under of rule 9(1) of Schedule-IV(A) to the ITA, unless the employee renders contineous service with his employer for 5 years or the discontinuance is due to cause beyond control of the employee. This balance is also exempt if it is transffered to the employee's individual account in any RPF maintained by his new employer or by the PF Commissioner. Service under his former employer or employers shall be included in computing the total period of continuous service.

   Out o ftotal contribution of the employer(12% of basic salary of the employee), 8.33% or Rs. 542 whichever is less is deposited in the employee Pension Fund and the balance to the Employee Provident Fund as illustrated below:

   Basic Salary of Employee (Rs.)	Employer's total Contribution (12% of basic salary)	8.33% of Salary	Rs. 542	Contribution Pension Fund (Least of 'b' and 'c')	Contribution Provident Fund (3.67%)
   Rs.	(a) Rs.	(b) Rs.	(c) Rs.	(d) Rs.	(e)=(a-d) Rs.
   4,600 8,100	552 972	383 675	542 542	383 542	169 430

3. Unrecognised Provident Fund, not approved by the IT Commissioner is a bad baby deserving heavy punishment. If the number of employees is less than 20, the PF Commissioner finds it inconvenient to handle this account. The employer does not have the wherewithal to establish a trust and follow the investment norms. Instead of coming to the rescue of such small organisations, the punishment is heavy. Employee's contribution does not qualify for deduction u/s 88! The employer's contribution and interest thereon are brought to tax as profit in lieu salary in the year when the payment is made. Interest on employee's own contribution is taxable as Income from other sources