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:

  1. Statutory Provident Fund (SPF)
  2. Recognised Provident Fund (RPF)
  3. Unrecognised Provident Fund (URPF)
  4. Public Provident Fund (PPF

The tax treatment is given below:

Employer’s ContributionFully exemptAmount in excess of 12.00% of salary is taxableNot taxable yearlyN.A. (as there is only assessee’s own contribution)
Employee’s ContributionEligible for deduction u/s 80CEligible for deduction u/s 80CNot eligible for deductionEligible for deduction u/s 80C
Interest on PFFully exemptAmount in excess of 9.50% p.a. is taxableNot taxable yearlyFully exempt
Amount received on retirement, etc.Fully exempt u/s 10(11)SEE NOTE 1SEE NOTE 3Fully 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



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Having on his soul, the passion to be the Virtuoso of the enumerated aspects of commerce, Dipesh Aggarwal is indulged in the constant process of absorbing the maximum from the infinite knowledge pool available. Mentoring the youth has proved to be his successful manoeuvre in contemplating, analysing and executing his understanding of varying and crucial aspects.

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