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Provident Funds – Types, Tax Benefits and Most Common Queries

Provident Funds is one of the most loosely defined terms used by the taxpayer. At the macro level, except PPF, rest all types of provident funds are perceived as one and the same only. There are no efforts to educate the readers regarding the same. The tax treatment of different types of provident funds is different. For an investor/employee, the understanding of the types of provident funds is critical and important.

Last week, one of my readers posted a query on withdrawal of provident fund. He worked in an organization from 1993 till 2013 as a blue-collar employee. He had to leave the organization because of poor health. He requested his employer for withdrawal of PF contribution.

Unfortunately, his employer delayed the process by 3 years. Recently, when he received his PF amount, it was much lower than his expectation and actual contribution made. On further probing, we came to know that provident fund account maintained by the employer was in the category of un-recognized provident funds. As this type of provident fund is not regulated/registered, therefore, there are a lot of irregularities in the management of the same. Therefore, it is important for an employee to understand the types of provident funds as it is your hard earned money. The knowledge of rules and regulations helps you to handle the case in a better way.

Types of Provident Funds

According to Income Tax Act, there are 4 types of provident funds namely

1. Statutory Provident Fund: It is also known as GPF or General Provident Fund. It is maintained by PSU’s and subscription is restricted to Govt Employees. By Govt employees i mean Central Govt, Semi-Govt, and State Govt employees.

2. Recognized Provident Fund: It is also known as EPF or Employee Provident Fund. It is mainly for private sector employees. Any organization with 20 or more than 20 employees, It is mandatory to subscribe to Recognized Provident Fund. An organization with less than 20 employees can also join Recognized Provident Fund voluntarily but it is not mandatory.

Under this option, the organization has a choice to join either the Govt Scheme that is set up and run by the PF Commissioner. Alternatively, the organization can set up its own trust. Big organizations like Tata etc have set up their own trust. For example, TTSL PF trust is known as Tata Teleservices Provident Fund. The PF trust is maintained with the respective EPFO office. A trust can be set up only after 3 years of its establishment.

In either case, Besides PF commissioner, the organization has to seek approval from Income Tax Commissioner to set up/join the PF Scheme/Trust.

3. Un-recognized Provident Fund: Un-recognized provident funds are like private provident funds. In other words, they don’t need/have permission from PF commissioner and commissioner of Income tax.

4. Public Provident Fund: Practically this option is for general public who cannot avail the benefit of any other types of provident funds (statutory in nature). Provident fund as such is more of a retirement planning tool or to meet long-term goals/objectives like child’s education or marriage. If i am not a salaried employee then how can i take the benefit of the provident fund? The answer is i can open a PPF or Public Provident Fund with bank or post office. I covered it in detail in my post on Public Provident Fund. In other words, it is not mandatory to be in employment to open provident fund account. General public may opt for PPF.

Now we have an idea of various types of provident funds, therefore, let’s check their tax implications.

Provident Funds & Tax Benefits

Let’s divide the tax benefits into 4 stages/steps and check the tax treatment under each type for respective provident funds.

1. Statutory Provident Fund:

(a) Employer’s Contribution: Fully Exempted from Tax

(b) Employee Contribution u/s 80C: Yes. Subject to the max limit.

(c) Interest Earned: Fully Exempted from Tax

(d) Withdrawal: Fully Exempted from Tax

2. Recognized Provident Fund:

(a) Employer’s Contribution: Only 12% of the Salary. For the calculation purpose, the salary includes Basic Salary, DA or Dearness Allowance, and Commission based on fixed % of the turnover achieved by the employee.

(b) Employee Contribution u/s 80C: Yes. Subject to the max limit.

(c) Interest Earned: Fully Exempted from Tax if the rate of Interest is upto 9.5%. If the interest rate is more than 9.5% then the additional/excess interest is charged to tax.

(d) Withdrawal: Fully Exempted from Tax subject to fulfillment of following conditions.

  • Continuous Service of 5 years or more than 5 years. In this case, if there is an intermediate change in employment but employee transferred PF from the previous employer to new employer, the period of service of the previous employer is included in the calculation of 5 years continuous service. For example, if i worked with Employer A for 2 years, Employer B for 3 Years and Employer C to 1 year. I transferred my PF from Employer A to Employer B and then to Employer C. After leaving Employer C, i withdrew my PF. In this case, my period of continuous service for PF withdrawal will be 6 years i.e. my service will be considered as continuous from date of joining of employer A. My PF withdrawal will be fully exempted from tax.
  • Termination of service due to poor health, discontinuation of business or any other reason beyond the control of an employee.
  • Transfer of PF balances to recognized provident fund of a new employer.

3. Un-recognized Provident Fund:

(a) Employer’s Contribution: Fully Exempted from Tax

(b) Employee Contribution u/s 80C: No

(c) Interest Earned: Fully Exempted from Tax

(d) Withdrawal: The amount received is divided into 4 part i.e. employer’s contribution and interest on the same. Employee’s contribution and interest on the same. Taxation will be as per following conditions

  • Employee’s contribution is tax free. Interest on Employee’s contribution is taxed under “Income from other sources”.
  • Employer’s contribution and interest on the same will be taxed as “Salary Income”. An employee can claim relief u/s 89.

4. Public Provident Fund:

(a) Employer’s Contribution: Not applicable as there is NO contribution from the employer.

(b) Employee Contribution u/s 80C: Yes. Subject to the max limit.

(c) Interest Earned: Fully Exempted from Tax

(d) Withdrawal: Fully Exempted from Tax

Words of Wisdom: Provident Fund is one of the most tax efficient investment options. It is beneficial for long term investment or goals. One of the operational issues is inoperative EPFO a/c. After the introduction of UAN, this issue is resolved, as an employee you can link the EPF a/c to UAN. Still, if you have any inoperative EPFO a/c, you can check my post on how to withdraw money from inoperative EPFO a/c.

If your salary structure is tax friendly and you are not able to contribute sufficient amount in EPF then you may opt for Voluntary Provident Fund or VPF. Always remember that interest rate is not guaranteed on provident funds. The rate of interest on PPF is announced on a quarterly basis from 1st April 2016. On the other hand, the interest rate on GPF and EPF is announced every year. Be assured that interest rates offered on various types of provident funds will be one of the highest among all small savings schemes.

Copyright © Nitin Bhatia. All Rights Reserved.

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Prasanth
Prasanth
7 years ago

Hi Nitin,

When I was a child ,my father took an LIC policy. The policy is like my father should pay 1800 per year for 20 years and at the time of maturity LIC will give some 50K. Though we received the full amount, this policy became a big financial flop for our family considering the value of 50K at the time of maturity.

In this context, I always fear in keeping money in PF. Considering the inflation rates and other factors should we maintain the amount in PF for long term or is it wise to withdraw amounts at regular intervals citing various reasons (like home purchase etc..). Please let me know your thoughts in this regard.

Thank You!

indrakumar
indrakumar
7 years ago
Reply to  Prasanth

never mix insurance & investment as purpose of both is different . Insurance is for covering untoward incident , so one should go for term plan & not expect any return . PF is one of the best risk free investment & also rate of interest is fair & also tax free . The point we need to understand is what we get after adjusting for inflation . Also note that the interest is calulated on compunding basis so u are earning interest on interest . My suggestion is to use pf only in emergency cases and for investment wherein u are sure of earning more then pf roi .

Manish
Manish
7 years ago
Reply to  indrakumar

Guess what he is pointing out to time value of money. In theory the money should not depreciate if the returns are more than inflation. You are targeting better return though investment which carry some risk where as ppf is practically risk free as the returns are guaranteed by trusts backed by GOI. I am sure this still doesn’t make any sense and this is where Nitin is best in making things simple and clear.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Prasanth

I agree with you but if you are concerned about the safety of capital backed by sovereign guarantee offering max interest rate under small savings schemes with tax benefits then PF is the best choice.

As i mentioned PF is for long term goals therefore it is perfectly fine to withdraw the amount for property purchase, child education, retirement etc.

Manish Gupta
Manish Gupta
7 years ago

Hi Nitin, request your views on NPS based on the current returns and scenario for an employee in private sector with a tax slab of 30 pc. The limit of section 80C is being used in full from last few years.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Manish Gupta

Personally i will not prefer NPS.

Manish Gupta
Manish Gupta
7 years ago
Reply to  Nitin Bhatia

Thanks

Clive Sinclair
Clive Sinclair
7 years ago

Urgent Please..
I had my PPF account with SBI which matured on 1 Apr’15 after 15 yrs. I didn’t rxd any intimation of maturity from SBI so I couldn’t submit Form H for extension. Now on 16 Feb’17, when I came to know of maturity, I wanted to submit Form H. But SBI refused to extend the account stating that I should have applied for extension before 31 Mar’16.
SBI says I should now submit Form C to withdraw the balance but balance will not earn any interest from 1 Apr 16 onwards.
Kindly suggest :-
1. I am told that even after maturity, PPF account continues to earn interest till I withdraw the balance. Pl provide supporting rules if this is correct.
2. Is SBI required to intimate about maturity to me? Can I complain of deficiency in service and ask SBI to extend the account for 5 yrs? If yes, pl guide me on whom to write for the same.
3. If I have no recourse and I close the account with Form C, can I still open a new PPF account?
Thanks

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Clive Sinclair

1. You are right. You can earn interest even after maturity even if it is not closed. Secondly, it must be automatically extended by 5 years (without contribution) on 1st April, 2016 as after the wait of 1 year, the account is automatically extended. You may cross check with the bank.
2. No. It is not bank’s responsibility.
3. If the account is not extended automatically then you can close and open new PPF account.

Ajay Agrawal
Ajay Agrawal
7 years ago

Hello Sir,
I am an IT company employee. Writing this to you on having a query on EPS.
I have switched multiple companies in Past and have transferred PPF from old companies to new companies. However in the process; none transferred EPS part to the new company
Looking for your inputs / suggestions on below queries.
1. Where we can see this money accumulated.
2. Which govt. body (similar to EPFO for EPF) will redeem / allow withdraw of this fund. I have completed 15 + years of experices.
3. What are the process and conditions to perform withdraw

Diff companies where I have moved are as below
TCS Mumbai (Last worked in 2007) (EPS was approx. 5 K)
TCS EPS account – MH/BAN/48475/000/24925
TCS PF account – MH/BAN/48475/156420
iGATE Global (Now Capgemini left in 2013) – Bangalore (EPS was approx. 40 K)
IGATE PF account number: PY/KRP/18453/8817
IGATE EPS Account number: PY/KRP/18453/8817
LNT Infotech, Bangalore (Left in 2015) (EPS was approx. 8 K)
LNT PF Account – MH/424/0166377 (PF with L &T Trust)
LNT EPS account – TH/THA/0000424/000/109228
Infosys, Bangalore – Currently working with.
Here PF from all companies are accumulated, But EPS is not showing up in balance. On checking with respective finance teams. Below are the responses.

L&T -> For EPS transfer your have to claim online on EPFO portal through your UAN Login. UAN : 100074785749
TCS -> TCS don’t have any access with regards to the pension accumulations balance, as it is maintained by RPFC (Regional PF Commissioner’s office). And also RPFC does not provide any statement to it’s members.

Looking for your kind inputs to help address this scenario

Thanks and regards
Ajay

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