Provident Fund

PF 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 this pocket, to the fund. The
contributions of the employers and the employee are invested in approved securities. Interest
earned thereon is also credited to the account of the employee. Thus, the credit balance in a
provident fund account of an employee consists of the following

 Employee’s contribution
 Interest on employee’s contribution
 Employer’s contribution
 Interest on employer’s contribution

The accumulated balance is paid to the employee at the time of his retirement or resignation. In the
case of death of the employee, the same is paid to his legal heirs.

The provident fund represents an important source of small savings available to the government.
Hence, the income tax act 1961 gives certain deductions on savings in a provident fund account

Types of Provident Funds

 Statutory provident fund:- The SPF is governed by PF Act 1925. It applies to employees of
Government, Railways, Semi Government institutions, Local bodies, universities and all
recognized educational institutions.
 Recognized provident fund:- RPF means a PF recognized by the commissioner of income
tax for the purposes of income tax. It is governed by Part A of schedule IV to the income tax
act 1961. This schedule contains various rules regarding the following:
o Recognized of the fund
o Employee’s and Employer’s contribution to the Fund
o Treatment of accumulated balance etc
A Fund constituted under the employee’s provident Fund and miscellaneous provisions act
1952 will also be a recognized provident fund
 Un-recognized provident fund:- A fund not recognized by the commissioner of income tax
is unrecognized provident fund.
 Public provident fund: PPF is operated under the PPF Act 1968. A membership of the fund
is open to every individual through it is ideally suited to self employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer. An
individual may contribute to the fund on his own behalf as also behalf of minor of whom he
is the guardian.
Tax Treatment for Provident Fund

1. During the Employment Period

Particulars Statutory PF Recognized PF Unrecognized PF Public PF

E.Yer’s Fully Exempt Amount in excess Not Taxable N.A
Contribution of 12% of salary yearly
is taxable
E.Yee’s Eligible for Eligible for Not eligible for Eligible for
Contribution deduction U/S Deduction U/S deduction deduction U/S
80C 80C 80C
Interest credited Fully Exempted Amount is Excess Not taxable Fully Exempt
of 9.5% p.a is yearly
taxable

2. At the time of Retirement

A. SPF/RPF/PPF:- The payment received by an assessee from the following funds at the time of
retirement or otherwise, would

from tax under the section 10(11) and (12)

Section 10(11) Section 10 (12)

PF to which PF act applies Public Provident fund Accumulated balance payable
to an employee participating in
a RPF
B. Unrecognized PF :- Amount received on the maturity of URPF

 Employee’s contribution is not taxable

 Interest on employee’s contribution is taxable under income from other sources
 Employer’s contribution and interest thereon is taxable as salary
Illustration 01

Mr. A retires from services on 31st December 2020, after 25 years if service. Following are the
particulars of his income/investments for the previous year 2020-21:

Particulars Amt. in Rs
Basic Pay @ 16,000 PM for 9 Months 1,44,000
Dearness Pay (50% forms part of the retirement benefits) Rs 8,000 PM for 9 months 72,000
Lumpsum payment received from the unrecognized Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the unrecognized PF, the employer’s contribution was Rs 2,20,000
and interest thereon Rs 50,000.
The employee’s contribution was Rs 2,70,000 and the interest thereon Rs 60,000.
a. What is the taxable portion of the amount received from the URPF in the hands of Mr. A for the AY
2021-22 ?
b. Will your answer be any different if the fund mentioned above was recognized provident fund?

Ans:- 330,000 and NT

Illustration 02:
Mr. B is working in XYZ ltd and has given the details of his income for the PY 2020-21. You are
required to compute his gross salary from the details given below
Basic salary Rs 10,000 PM
DA (50% is for retirement benefits) Rs 8,000 PM
Commission as a percentage of turnover 0.1%
Turnover during the year Rs 50,00,000
Bonus Rs 40,000
Gratuity Rs 25,000
His own contribution in the RPF Rs 20,000
Employer’s contribution to RPF 20% of his basic salary
Interest accrued in the RPF @

Ans: 292,740-GS,
Illustration 03:
Mr. X has earned the following from the employer during the previous year
Basic Pay Rs 10,000 PM
Dearness allowances (60% forms part of salary) Rs 3,000 PM
Commission (Fixed) Rs 31,000
He contributes Rs 20,000 towards PF and The Employer also makes a matching contribution.
Interest credited in the Provident Fund on 07 th Feb 2021 Rs 57,645 @ 14% p.a at the time of
retirement on 31st march 2021.

The employee received Rs 23,59,500 (Employer’s contribution Rs 7,00,000 and Interest thereon Rs
3,01,000 as well as Employees’ contribution Rs 9,50,000 &Interest thereon 4,08,500).
He has retired after continuous services of 11 years. Compute the total income of Mr. X for the
assessment year 2021-22 assuming
a. The provident fund is statutory
b. The Provident fund is recognized
c. The provident fund is unrecognized
Sources

RPF

Particulars Amount in Rs Amount in Rs

Basic salary (10,000*12) 120,000
DA (3,000*12) 36,000
Commission 31,000
Employer Contribution 20,000
Less:- Excess of 12% of salary is exempted
(120,000+21,600)*12% 16,992 3,008
Interest received on PF 57,645
Less:- Excess of 9.5 % is exempted
(57,645*9.5/14) 39,116 18,528
Gross Salary 2,08,536
Less:- Standard Deduction 50,000
Net salary 1,58,536
Less:- Deduction U/S 80C
Employee contribution to PF 20,000
Total income 1,38,536
Or
1,38,540

Ans: 117,000;138540;15,46,000

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https://www.incometaxindia.gov.in/Documents/Students/Learning/Retirement%20Benefits
%20(Theoretical).pdf