What is Provident Funds

8/3/2019 What is Provident Funds

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Introduction:

Provident Funds

Provident Funds provides a compulsory contribution for the future of an employee after his

retirement or for his dependents in case of his early death. In such fund employee and employer

contribute equally. It is compulsory for any organization in which more than 20 employee

working to contribute in Provident fund

Employees Provident Fund

It is a Fund built up by contributions made by the employee during his working life and an equal

contribution by his employer @ 12% of his salary at present and is payable back to him together

with interest on exit from employment.


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Different Types of Provident Fund

On the basis of coverage Provident Fund can be largely divided into two kinds:-

Statutory Provident Fund

For all industries employing 20 or more persons engaged in any industry specified in Schedule

- I attached to the Employees' Provident Funds & Miscellaneous Provisions Act, 1952 or for all

Establishments or classes of Establish- ments to which the said Act has specifically been made

applicable by the Central Government by issue of notification in Gazette of India, such

Provident Fund is compulsory for employees drawing salaries (Basic + DA) of upto Rs. 6500/-

pm.

Voluntary Provident Fund

For all other Industries/Establishments and for all employees drawing salaries of above Rs.

6500/-/- employed in Industry/Establishment in which such PF is compulsory, the Provident

Fund is voluntary and the benefit of provident fund can be extended by setting up a private PF

Trust and by getting the same recognized under Income tax Act, 1961 or by getting the

Establishment/ employees covered under the EPF & MP Act, 1952 /EPF Scheme, 1952 on

voluntary basis.

Besides the above two categories, there are various types of Provident Funds listed as under:-

Recognized Provident Fund (RPF)

It is a fund to which the Commissioner of Income-tax has given the recognition as

required under the Income-tax Act.


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Unrecognized Provident Fund (URPF)

It is the Provident Fund, which is not recognized by the Commissioner of Income-tax.

The employee and employer both contribute towards this fund. The employee's

contribution to URPF is not treated as deductible expenditure.

Public Provident Fund (PPF)

Self-employed people (doctors, lawyers, accountants, actors, traders, pensioners) can

also enjoy the benefit of tax rebate under section 88 by contribution to PPF.

Various Types Of Establishments

Even in Factories/Establishments where PF. is compulsory, such Factories/ Establishment have

two options - one to comply with the statutory scheme i.e. Employees Provident Fund Scheme,1952 and another to set up their own PF Trust, get it recognized by the Income Tax authorities

and to seek exemption from RPFC/appropriate Govt. to run its own Trust subject to such

conditions as may be imposed by them. The former is called unexempted establishments; the

later exempted ones.

Procedure For Withdrawal Of PF

A member of the PF can withdraw the full amount on retirement from service after attaining the

age of 55. The full amount can also be withdrawn if:


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1. A member who has not attained the age of 55 at the time of termination or resignation

from the service.

2. Member is retired on account of permanent and total disablement due to bodily or mental

infirmity.

3. On migration from India for permanent settlement or employment abroad.

4. In case of mass or individual retrenchment.

A member can withdraw up to 90% of the amount of PF after attaining the age of 54 years or

within one year before actual retirement, whichever, is later.

A member of provident fund can avail nonrefundable advance for the following purposes:

1. For acquiring or construction of immovable property or for repayment of loans taken

from specified agencies for the said purpose.

2. Advances in special cases such as lock out in factory/establishment.

3. For treatment of illness.

4. For marriages or post matriculation education of children.

5. Financing of member's life insurance policy.

6. Where moveable/immovable property gets damaged by a calamity of exceptional nature

or accident.

7. For purchase of an equipment required to minimize the hardships on account of handicap.

Advances/loans for building/ purchase of flat or house site/ educational purposes requires a

minimum completion of 5 years and 7 years of membership of the fund. In other cases there is no

requirement of any membership but grant of loans in such cases is subject to some conditions

specified in the scheme.

Procedure for withdrawal partial amount from provident fund account


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stipulated therein i.e. within 25 days of close of every month in the case of monthly returns

and within 30 days of the close of the year in the case of annual return.

3. To assist the Department in settlement of PF claims of the outgoing members and in grant of

advances for the specified purposes to the existing members.

In Indian Provident Fund Tax System

In India there are four types of Provident Fund.

1. Recognized Provident Fund (RPF)2. Unrecognized Provident Fund (URPF)3. Statutory Provident Fund (SPF)4. Public Provident Fund (PPF)

According to the provident fund law all provident funds such as Recognized provident fund,

unrecognized provident fund, public provident fund and statutoryprovident fund come under the

bracket of tax exemption.

1) Recognized Provident Fund (RPF)This type of provident fund is applicable to an organization with strength of 20 or more

employees. A Recognized provident fund should be approved by the Commissioner of Income

Tax. An employer and a group of employees can start this type of recognized provident fund

together by forming a trust. According to Section 80-C up to 12% of salary is exempted from the

tax. Interest rate of 9.5% is added to the salary. Nothing will be taxable if the employee left the

job after five years of completion of service or an employee left the job due to terminal illness. If

the business is shut down, the employee is not subjected to tax.

2)Unrecognized Provident Fund (URPF)This type of provident fund is not recognized by the commissioner of income tax. They have a

different tax structure other than recognized provident fund (RPFs). There will be no deduction


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under section 80-C available. Any amount of contribution is not taxable. Here, the employers

contribution is taxable as salary income. Employees own contribution is non-taxable.

3) Statutory Provident Fund (Spf)This fund is usually applicable for Government organizations, Universities and educational

institutes.

4) Public Provident FundPublic provident fund commonly known as PPF is one of the best tax saving schemes in

India. It is mostly preferred by the employees working in private organizations. Many people

who work in private organizations do not have any structured pension plans like government

organizations.

Tax Treatment of Different Provident Fund

Statutory

Provident

Fund

Recognized Provident Fund Unrecognized

Provident Fund

Public

Provident

Fund

1 2 3 4 5

Employers

contribution to

provident fund

Deduction under

Section 80C

Interest credited to

provident fund

Exempt

from tax

Available

Exempt

Exempt up to 12% of salary -

excess is taxable

Available

Exempt up to notified rate (now

8.5%)

Exempt from tax

Not available

Exempt

Employer

does not

contribute

Available

Exempt


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Lump sum payment

received at the time

of retirement or

termination of

service

Exempt Exempt in some cases:

1)If the employee has worked

for at least 5 years with the

employer

2) If the service is terminated on

account of ill-health or by

contraction or discontinuance of

the employers business or any

other reason beyond control of

employee

3)If the employee transfers the

balance in his PF to his new PF

a/c maintained by his new

employer

Employee

contribution is

exempt

Exempt

Deduction Available For Contribution Of Provident Funds

From assessment year 2006-07, section 80C provides for an outright deduction on certain

contributions/payments subject to three basic conditions:

The contributions/payments must have been made during the relevant previous year The aggregate amount qualifying for deduction should not exceed Rs.1 Lakh The sum paid or deposited need not be out of income chargeable to tax but deduction

should not exceed income which is chargeable to income tax.

This has reference to Section 80C of Income Tax Act


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Places where can open a provident fund account

1. General post office (GPO) and its branches2. Public sector banks throughout the country3. Organization or industry where you are employed

If an employee is leaving the job, his/her provident fund is transferable from one company to

another provided a provident fund account numbers. After the completion of terms in the office

or at the maturity of the term, an individual person or an employee can claim

his/her provident fund.

Procedure of claiming Provident fund

This is a somewhat lengthy procedure. This should be noted to claim a provident fund it needs a

standard procedure to claim.

Let us have a look at the corporate procedure to claim a provident fund: Once the exit interview

with the HR is complete, a provident fund form will be handed over to the employee:

To get the provident fund amount, the employee needs to fillhis/her provident fund account number on the PF form, without a correct PF number, the

PF department will not disburse the amount.

Employee can withdraw their PF money in two ways:o An individual or employee can claim through bankers check that will be issued

by the PF office.

o On their individual bank account. To deposit the PF amount into their accountemployee needs to declare their bank account details on theprovident fund form.

On provident fund form, it is also mandatory to paste two revenue stamps. Withoutrevenue stamps, the PF form will be rejected from PF office.


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According to a new clause in 2010 it is also mandatory to attach a cancelled check if anemployee wants to encash the PF amount into their account to verify the account

number and bank address. This action is implemented to stop any kind of fraud claims.

It will almost take three to six months to get the provident fund amount into the account.

Transfer a Provident Fund Account

Provident fund amount is transferable. If an employee is changing his /her job, they can transfer

their PF account from the current company. To transfer theprovident fund account, the employee

needs to provide their previous PF account number to their new organization.


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Bibliography:

Books:

Direct taxes: V.K.Singhania

Websites:

http://www.tax4india.com/retirement-benefits/provident-fund-india.html http://www.onemint.com/2011/03/14/tax-on-provident-fund-withdrawal/ http://www.welcome-nri.com/info/project/planretire.htm http://www.rupeex.com/doc/ProvidentFund.html
http://www.tax4india.com/retirement-benefits/provident-fund-india.htmlhttp://www.tax4india.com/retirement-benefits/provident-fund-india.htmlhttp://www.onemint.com/2011/03/14/tax-on-provident-fund-withdrawal/http://www.onemint.com/2011/03/14/tax-on-provident-fund-withdrawal/http://www.welcome-nri.com/info/project/planretire.htmhttp://www.welcome-nri.com/info/project/planretire.htmhttp://www.rupeex.com/doc/ProvidentFund.htmlhttp://www.rupeex.com/doc/ProvidentFund.htmlhttp://www.rupeex.com/doc/ProvidentFund.htmlhttp://www.welcome-nri.com/info/project/planretire.htmhttp://www.onemint.com/2011/03/14/tax-on-provident-fund-withdrawal/http://www.tax4india.com/retirement-benefits/provident-fund-india.html

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