The fundamental reason that the government has set up several kinds of provident funds is to push the savings rate high for the social security of employees. Usually, the employees contribute a fixed percentage of their salary towards these funds, and in most cases, the employer contributes.
The total contribution along with interest will be credited to the account of the employee. The payment can be extracted out of this fund at the specified time of retirement and at some other occasions as and when they arise. For the businesses having Pvt. Ltd company registration in India that employs more than 20 people, it is mandatory to get registered under EPF scheme.
There are four kinds of provident funds as given below;
- Statutory provident funds.
- Recognised provident funds.
- Unrecognised provident funds.
- Public provident funds.
Now, let’s discuss each of them one-by-one.
- Statutory provident funds.
The statutory provident fund was initiated in the year 1925 via the provident funds Act of 1925. The statutory provident fund was initiated to promulgate savings amongst the government employees. Usually, this fund is maintained by the government or semi-government departments such as RBI (reserve bank of India), railways, local bodies, universities, insurance companies, etc.
Tax repercussions.
The employee’s contribution towards the employee’s statutory provident fund and the amount of interest earned on the accumulation balance to the employee’s credit balance will not be included in the employee’s income, and it will be ignored. The employee’s very own contribution would be subject to consideration for deduction under section 80C. At the time of retirement or when they lefts the service and receives any amount from the accumulated balance to their credit in the statutory provident fund, the amount so received will not be considered in the employee’s total income under section 10(11) being exempted income.
- Recognised provident fund.
A recognised provident fund is a fund to which the commissioner of income tax has given the recognition as needed under the income tax Act. Usually, the recognised provident fund is maintained by industrial undertakings, banks, business houses, etc.
Tax repercussions.
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The employee’s contribution over and above the twelve percent of the employee’s salary will be considered in the employee’s salary income for tax purposes. The employee’s contribution towards this fund will be entirely qualified for deduction under section 80C.
Interest on provident fund credit balance up to the stated rate is exempted. Still, interest credited over and above such a rate of 9.5% is considered to be the employee’s salary income and included in the salary income of that preceding year.
- Unrecognised provident fund.
An unrecognised provident fund is a fund that the commissioner of the income tax does not recognise. The employee and the employer both contribute to this fund.
Tax repercussions.
The employee’s contribution is added to this salary if the net is given, and they will not be given any deduction under section 80C concerning this contribution while calculating the employee’s net income. The employee’s contribution and interest in the fund’s accumulated credit balance are not to be included in the employee’s salary income from year to year.
The payment received out of the find will be taxable so far. It shows the employer’s contribution and interest thereon. The employee has the right to get relief under section 89(1). The employee’s contribution will be ignored as it was taxed when it was contributed. It is to be understood that the interest on the employee’s own contribution will be subject to tax as income from other sources and not as the salary income.
- Public provident fund.
The funds as mentioned above were for salaried persons. The new fund, referred to as the public provident fund, was initiated on 1st July 1968 so that self-employed people can also be beneficiaries of deduction under section 80C. It is a simple and pocket-friendly fund. Its subscription can be betwixt 500 to 150000 yearly. At once, one can only deposit in multiples of fifty, and in one month, only one deposit is allowed and, in the year, minimal subscription has to be 500 and maximum 150000. Withdrawal can be made after fifteen years, but in case of the subscriber’s demise, full repayment will be made to the legal successor of the nominee. Partial loans and withdrawal are allowed. You can also check a quick guide on how to withdraw from accumulated provident fund to get started with the withdrawal process.
Tax repercussions.
The subscription towards this type of fund is subject to deduction similarly, as in the case of statutory provident fund. Interest credited in this account is entirely exempted.
Transferred balance.
When unrecognised provident fund is recognised for the first time, the credit balance in the employee’s unrecognised provident fund will be transferred to a recognised provident fund account. It will be referred to as transferred balance. It would be treated as RPF from the day of its onset, and the exemption will be permitted likewise. The only excess of the amount transferred to RPF over exempted amount will form the taxable portion of the transferred balance.
