What are the different kinds of Provident Funds?
At present there are 4 types of provident funds:
- Recognized Provident Fund (RPF): This scheme is applicable to an organization which employs 20 or more employees. An organization can also voluntarily opt for this scheme. All RPF schemes must be approved by The Commissioner of Income Tax. Here the company can either opt for government approved scheme or the employer and employees can together start a PF scheme by forming a Trust. The Trust so created shall invest funds in specified manner. The income of the trust shall also be exempt from income taxes.
- Unrecognized Provident Fund (URPF): Such schemes are those that are started by employer and employees in an establishment, but are not approved by The Commissioner of Income Tax. Since they are not recognized, URPF schemes have a different tax treatment as compared to RPFs.
- Statutory Provident Fund (SPF): This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.
- Public Provident Fund (PPF): This is a scheme under Public Provident Fund Act 1968. In this scheme even self-employed persons can make a contribution. The minimum contribution is Rs.500 per annum and the maximum contribution is Rs.70,000 per annum. The contribution made along with interest earned is repayable after 15 years, unless extended. The rate of interest is statutorily set at 8% per annum.
An Exempted Trust cannot credit interest less than the statutory rate of interest stipulated even if the Trust is not able to earn the minimum interest.
AUDIT OF PROVIDENT FUND TRUSTS
Valuation of Securities & Amortisation of Premium
Settlements during the year
Advances / Loans
Submission of Returns
Health of Securities
The Rate of Interest declared by EPFO for FY 2003-04 and FY 2004-05 on PF contributions is 9.5% p.a.
The employer can decide to contribute any amount up to 12%. Employer contribution above 12% is taxable in hands of employees
Employee Contributions eligible for Sec. 88 rebate / 80C Deduction Interest on Employer and Employee contributions are tax free
However, withdrawls before completion of 5 years of membership, become taxable in year of withdrawal with condtitions.
Establishments employing 20 or more persons and engaged in any of the 177 industries / Businesses specified.
Formation of PF Trusts
EPS deduction, to be paid to the RPFC cannot be made from the Employee’s contribution.
The EPS deduction of 8.33% can be made only from the employer’s contribution of 12% of Basic and DA.
This is capped at Rs.6500/-
Formation of PF Trusts
When can a company opt to set up an Exempted Trust ?
-Covered under the provisions of the PF &MP Act, 1952
-Profit making Company
-Pass a Board Resolution
-File for exemption with the RPFC
-Apply to the CIT for recognition of PF Trust
-On receipt of the approval from RPFC the Trust can comply as “Exempt”
What is the Tax treatment of Provident Fund?
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:
|Fund||During Continuity of Job||Upon Retiremen|
|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.|
AUDIT OF PROVIDENT FUND TRUSTS
Statutory rate of contribution is 12% of emoluments (basic wages, dearness allowance, cash value of food concession and retaining allowances if any,) in the case of 177 establishments.
Rate of contribution shall be 10% in case of the following:
Brick, beedi, jute, guar gum factories, coir industry other than spinning* sector.
Establishments declared as sick undertakings by BIFR.
Matching contribution is to be collected from the employees
Out of 12% (or 10% as the case may be) of the employer’s share of contribution, 8.33% is to be remitted towards pension fund.
Employer is also required to pay a contribution of 0.5% of the emoluments towards EDLIS’1976.