Question 5. Write brief notes on the following:
ii) Provident Fund.
Solution: Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The employer also generally contributes the same amount out of his pocket, to the fund. The contribution of the employer and the employee are invested in approved securities. Interest earned thereon is also credited to the account of the employee.
There are four types of provident funds:
- Statutory Provident Fund (SPF)
- Recognised Provident Fund (RPF)
- Unrecognised Provident Fund (URPF)
- Public Provident Fund (PPF
The tax treatment is given below:
|Employer’s Contribution||Fully exempt||Amount in excess of 12.00% of salary is taxable||Not taxable yearly||N.A. (as there is only assessee’s own contribution)|
|Employee’s Contribution||Eligible for deduction u/s 80C||Eligible for deduction u/s 80C||Not eligible for deduction||Eligible for deduction u/s 80C|
|Interest on PF||Fully exempt||Amount in excess of 9.50% p.a. is taxable||Not taxable yearly||Fully exempt|
|Amount received on retirement, etc.||Fully exempt u/s 10(11)||SEE NOTE 1||SEE NOTE 3||Fully exempt u/s 10(11)|
1) Amount received on the maturity of RPF is fully exempt in case of an employee who has rendered continuous service for a period of 5 years or more. In case the maturity of RPF takes place within 5 years then the amount received would be fully exempt only if the service had been terminated due to employee’s ill-health or discontinuance or contraction of employer’s business or other reason beyond control of the employee. In any other case, the amount received will be taxable in the same manner as that of an URPF.
2) If, after termination of his employment with one employer, the employee obtains employment under another employer, then, only so much of the accumulated balance in his provident fund account will be exempt which is transferred to his individual account in a recognised provident fund maintained by the new employer. In such a case, for exemption of payment of accumulated balance by the new employer, the period of service with the former employer shall also be taken into account for computing the period of five years’ continuous service.
3) Employee’s contribution is not taxable but interest thereon is taxable under ‘Income from Other Sources’. Employer’s contribution and interest thereon is taxed as Salary.
4) Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover