Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Tax Treatment of ‘Provident Fund’ for Income-tax Purposes – for Computing Salary Income

Tax Treatment of ‘Provident Fund’ for Income-tax Purposes  - for Computing Salary Income
Tax Treatment of ‘Provident Fund’ for Income-tax Purposes – for Computing Salary Income
Particulars SPF (Statutory Provident Fund) RPF ( Recognised Provident Fund) URPF (Unrecognised Provident Fund) PPF  ( Public Provident Fund)
1. Employee’s/  assessees’  contribution Deduction u/s  80C is  available from  gross total  income subject  to the limit  specified  therein Deduction u/s 80C  is available from  gross total income  subject to the limit  specified therein No deduction u/s  80C is available Deduction u/s  80C is available  from gross total  income subject  to the limit  specified therein
2. Employer’s  contribution Fully exempt  from tax Exempt upto 12% of  salary. Amount in  excess of 12% is  included in gross  salary. Not exempt but  also not taxable  every year. For  taxability see point  4 below Not applicable  as there is only  assessee’s own  contribution
3. Interest on  Provident Fund Fully exempt  from tax Exempt u/s 10 upto  9.5% p.a.  Interest credited in  excess of 9.5% p.a.  is included in gross  salary. Not exempt but  also not taxable  every year. For  taxability see point  4 below Fully exempt
4. Repayment of  lump sum amount  on retirement/  resignation/  termination Fully exempt  u/s 10(11) Exempt subject to  certain conditions.  See Note 2 below. Accumulated  employee’s  contribution is not  taxable  Accumulated  employer’s  contribution +  interest on  employer’s  contribution (till  date) is taxable as  profit in lieu of  salary. Interest on  employees  contribution (till  date) is taxable as  income from other  sources Fully exempt.  u/s 10(11)

 

IMPORTANT NOTES 

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.

Transferred balance of Unrecognised Provident Fund (URPF) when it is converted  into Recognised Provident Fund (RPF) :

As discussed above, payment from URPF is taxable to the extent of  employer’s contribution and interest thereon. On the other hand, payment from RPF is exempt, subject  to certain conditions. As such, if URPF is later on converted into RPF, out of the total amount standing  to the credit of the employee in the fund, the employee may opt to transfer the whole or a part of the  accumulated balance to the recognised provident fund. That part of the accumulated balance which is  not transferred and which relates to the employer’s contribution and interest thereon is taxable as  profits in lieu of salary.

That part of the sum transferred from URPF to RPF is taxable as under:

(i)            It will be assumed, as if, such URPF was recognised right from the beginning.

(ii)           As URPF will be treated as RPF right from the beginning, contribution by the employer every  year in excess of 10% of the salary of employee upto assessment year 1997-98 and 12% from  assessment year 1998-99 plus interest credited to the provident fund every year in excess of  9.5% shall be aggregated till the date of conversion of the URPF to RPF. This aggregate will  be included in the Gross Salary in the previous year in which the conversion took place  provided the whole accumulated balance is transferred to recognised provident fund account.

Where part of the accumulated balance is transferred to recognised provident fund, then  proportionate amount of the aggregate amount thus computed shall be taxable.

Further the  part of the accumulated balance which is not transferred to the recognised provident fund  shall also be taxable to the extent it relates to employers contribution and interest thereon and  the interest on employees contribution included in such accumulated balance will be taxable  under the head income from other source.

In other words, if the contribution by the employer  to URPF in the past years was 10% or less than 10% or 12% of the salary, as the case may be,  and the interest credited to URPF was 9.5% per annum or less than 9.5% per annum there  will be no Transferred Balance. Hence nothing will be taxable.

See also  [Section 44AD, 44ADA, 44AE]- Estimated or Presumptive Income method for Computing Business Income Under
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