Different Provident Funds and Income tax

There are different kinds of provident funds, which are utilized by a person for the purposes of investments and regular savings. These funds differ from each other in their operation and taxability. They are also governed by a different sets of rules.

The Provident Funds are categorized as follows:

  • Statutory Provident Fund/General Provident Fund – This is set up under the Act of the Parliament i.e. Provident Funds Act, 1925. This fund is maintained by Government and Semi-Government organizations. The Government employee contributes a certain amount of salary to this fund. The accumulations in this fund are paid to the Government employee at the time of retirement or superannuation. Every Government employee can have this account but the GPF is not available to the private sector employees. This fund can be used to draw advances known as GPF advances which are interest-free and are to be repaid in monthly installments. There is no bar on the number of GPF advances. This fund matures at retirement or superannuation.
  • Recognized Provident Fund – This fund is one which is recognized by the Commissioner of Income-tax according to the rules and provisions contained in the Income-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 organizations. This is a popular Employees Provident Fund. Any employer with 20 or more employees must register with this EPF and contribute to this Fund.
  • Public Provident Fund – This Fund is an investment and tax-saving instrument for Resident Individuals. The PPF account can be opened at any of the selected branches and subsidiaries of designated nationalized banks and selected post office branches. The minimum contribution for investment is Rs. 500 and maximum are Rs.1.5 lacs. It is a 15 years scheme and the account mature only after 15 years. There is no room for premature withdrawal with PPF. There is no facility of loans or advance from PPF or against PPF.
  • Unrecognized Provident Fund – Unrecognized provident fund is that provident fund which is neither a statutory provident fund nor a recognized provident fund and which is also not a public provident fund.

Taxability of the payments into and receipts from the provident fund:
The issue of taxability in respect of these funds arises at the time

  • Paying contributions into the fund,
  • Receiving the matured amount from the fund and
  • Interest earned on the fund.

The taxability at each of the stage is discussed as under:

Type of Provident Fund/Payments or receipts Statutory provident fund (GPF) Recognized provident fund (EPF/RPF) Unrecognized provident fund Public Provident Fund
Employer’s contribution to provident fund Exempt from tax Exempt up to 12 percent of salary; excess of employer’s contribution over 12 percent of salary is taxable Exempt from tax Not Applicable
(even if employee deposits into your PPF, it will be treated as part of salary)
Deduction under section 80C on employee’s contribution Available Available Not available The deduction is available on contribution made by the account holder
Interest credited to provident fund Exempt from tax Exempt from tax if the rate of interest does not exceed the notified rate; otherwise, excess of interest over the notified rate is taxable Exempt from tax Fully exempt
Lump-sum payment at the time of retirement or termination of service. Exempt from tax Exempt from tax in some cases, the otherwise provident fund will be treated as an un-recognized fund from the beginning Payment received in respect of employee’s own contribution is exempt from tax, Interest on employee’s contribution is taxable under the head “Income from other sources” and balance is taxable under the head “Income from Salaries”. However, relief can be claimed under section 89(1) Fully exempt