Transcript
Section 10(11) and 10(12) of the Act deal with exemption on payments from provident funds, while section 80C of the act deals with allowance of deductions on contributions to provident funds. The following are the types of provident funds.
Statutory provident fund
Statutory provident fund is set up under the provisions of the Provident Funds Act, 1925. This fund is maintained by Government and Semi-Government organizations, local authorities, railways, universities and recognized educational institutions.
Recognized Provident Fund
Recognised Provident fund is one which is recognized by the commissioner of income-tax is accordance with the rules contained in Part A of the Fourth Schedule tto theIncome Tax Act. It includes a provident fund established under a scheme framed under the Employees Provident Funds Act, 1952. This fund is maintained by private sector organization.
Unrecognized provident fund
Unrecognized provident fund is the provident fund which is neither a statutoryprovident fund nor a recognized fund and which is also a public provident fund.
Public provident fund
Payment from Public Provident Fund is exempt from tax as per notification No. 2430 dated 02-07-1968). See all about Public Provide Fund article.
Summarized table showing tax treatment of provident funds
StatutoryProvident F RecognisedProvident F Unrecognis PublicProvident Fu und und ed Providnt nd Fund Employer’s Exempt from tax Exempt up to 12 per Exempt Employer does not contribution cent of salary. Excess from tax contribute to of emplyer’s provident fun contribution over 12 d per cent of salary is taxable Deduction u/s Available Available Not Available 80C employe available e’s contribution Interest Exempt from tax Exempt from tax if rateExempt Exempt from Tax credited to of interest does not from tax provident fun exceed the notified rate d of interest (i.e. 9.5%). Excess of interest over the notified rate is, however, taxable Lump sum Exempt from tax Exempt from tax in See Notes Exempt from tax payment at some cases when not No.2 the time of exempt total income retirement or ofemployee will be termination of computed as service ifprovident fund is an unrecognized fund from the beginning
Notes:
1) Salary means basic pay, commission and dearness allowance and excludes all other allowances apnd perquisites.
2) Payment received in respect of emplyee’s own contribution is exempt from tax and interest on employee’s contribution is taxable under the head ‘Income from other sources. Balance is taxable under the head salaries. However, relief can be claimed.
3) Under section 10(12), the accumulated balance due to an employee participating in a recognised provident fund is exempt to the extent indicated under Rule 8 of Part A of the Fourth Schedule to the Act. This rule specifies that to avail the exemption.
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the employee should have rendered continuous service with his employer for 5 years or more; or if he has not rendered such service, it should have been terminated by reasons beyond his control; or if he has found another employment, the balance due to him should have been transferred to his account in the recognised provident fund of the new
employer. In so far as the employer’s annual contribution to such a fund is concerned, it shall be deemed to be income and taxed under the head “salaries” in the hands of theemployee.
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if it exceeds 10% of the salary; or if interest paid on the balance to the credit of the employee exceeds the rate notified by the Central Government. The Government had fixed the rate of
interest at 12% w.e.f. 1.4.1986 for the purpose of this provision. The employee’s own contributions to the extent of one-fifth of salary are eligible for tax relief u/s 88 with effect from the assessment year 1991-92 without any limit as to the amount of contribution. For these purposes (both for purposes of theemployee’s as well as the employer’s contribution), the term ’salary’ includes dearness allowance if the conditions of service so provide but excludes all other allowances and perquisites.