Aug 12, 20207 min read

Income Tax on Different Provident Funds: A Detailed Overview

Q: Q1. What are the three schemes under the Employee’s Provident Fund & Miscellaneous Provisions Act 1952?

The three schemes under the Act are: 1. Employee Provident Fund Scheme: This is a retirement savings and accumulation program for employees. 2. Employee's Pension Fund Scheme: This plan provides a monthly pension to employees upon their retirement. 3. Employee's Deposit Linked Insurance Plan: This plan offers assurance benefits in the event that an employee passes away while still employed.

Updated: Oct 15

Contributions made by employers and employees to a PF (Provident Fund) are either included in taxable income or exempt from it depending on certain tax regulations. PF is a long-term savings plan with tax advantages and competitive interest rates. The benefits and income tax associated with different types of provident funds—such as Statutory Provident Fund, Recognised Provident Fund, Unrecognised Provident Fund, and Public Provident Fund—vary according to the fund type.

Table of Content

Different Types of Provident Funds

What is an Employee Provident Fund?

Distribution of Employee Provident Fund

Taxability of the payments into and receipts from the provident fund

Conclusion

Most asked questions

Different Types of Provident Funds

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.

What is an Employee Provident Fund?

One popular provident fund program is the Employees' Provident Fund, or EPF. It's likely that you've also heard of this plan being considered in relation to wage issues. Organisations in the private sector with 20 or more employees generally use it. The current interest rate determines the rate of return on the amount deposited into an individual's Employee Provident Fund (EPF). The interest rate on the EPF is 8.25% annually for 2023–2024. The EPF Calculator is another resource you can use. Monthly contributions to the employee's account are made under the EPF plan by both the employer and the employee, typically in equal amounts. The particular percentage of contributions and the related accounts they are allocated to varies based on the employee's compensation.

Distribution of Employee Provident Fund

For Individuals with a Salary Less than Rs. 15,000

Employee contribution to EPF is 12% of the basic salary plus Dearness Allowance.
Employer contribution to EPF: 3.67% of basic salary plus Dearness Allowance.
Employer contribution to the Employee Pension Scheme (EPS) is 8.33% of basic salary plus Dearness Allowance. It is limited to a maximum of Rs. 1,250 per month (ceiling amount), thus any further contributions will be put in EPF. It should also be emphasised that no interest is earned on the funds paid to EPS.

This distribution ensures that the EPF receives 12% of the employee's pay, while the employer contributes 3.67% to the EPF and 8.33% (up to Rs. 1,250) to the EPS.

For Individuals with a Salary of More than Rs. 15,000

Employee contribution to EPF: 12% of basic salary plus Dearness Allowance.
Employer contribution to EPF: 3.67% of basic salary plus Dearness Allowance.
Employer contribution to EPS: Rs. 1,250.
Additional employer contribution to EPF: the remaining amount (calculated as 8.33% of the Basic Salary + Dearness Allowance less Rs. 1,250).

This distribution ensures that the employee contributes 12% of their salary to the EPF, while the employer contributes 3.67%, Rs. 1,250 to the EPS, and the remainder (i.e., 8.33% of the Basic Salary + Dearness Allowance minus Rs. 1,250) to the EPF.

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:

Statutory Provident Fund Account

Particulars	Income Tax Provision
Employee Contribution	Deduction allowed under section 80C
Employer’s Contribution	Exempt from tax
Interest Income	Exempt from tax as per the amendment
On Retirement	An employee's lump sum payment is exempt, subject to certain requirements outlined in the amendment.

Amendment w.e.f. April 1, 2021

The excess interest gained will not be exempt if an individual (other than the employer) contributes more than Rs. 2.5 lakhs to the Statutory Provident Fund Account in a given year. Instead, the interest income would be taxable and tax will be due when a lump sum payment is withdrawn. The yearly cap stays at Rs. 5 lakh in the event that the employer does not make contributions to the Statutory Provident Fund. Should the contribution above Rs. 5 lakhs, there may be tax implications on the interest earned on the excess contribution, which must be paid upon withdrawing the lump sum payment.

Recognised Provident Fund Account

Particulars	Income Tax Provision
Employee Contribution	Deduction allowed under section 80C
Employer’s Contribution	Exempt up to 12% of BS + DA
Interest Income	Exempt up to 9.5% interest p.a.
On retirement due to: Ill health or To transfer the balance to a new employer or Shut down of the employer’s business or After 5 years of service	The lump sum received by an employee is exempt
On retirement before five years of service for any other reason not mentioned in the point above	The lump sum received is taxable Exemption on the employer’s contribution and interest is withdrawn

Amendment w.e.f. April 1, 2021

The amount of interest earned on contributions made to the Recognised Provident Fund Account in excess of Rs. 2.5 lakhs in a year will not be exempt; rather, it will be taxable, and tax on such interest income will be due when the lump sum amount is withdrawn. This applies to contributions made to the account by individuals other than employers. If the employer fails to contribute to the Recognised Provident Fund, the annual cap remains at Rs. 5 lakhs. If the contribution exceeds Rs. 5 lakhs, the tax would be due on the interest earned on the excess contribution upon withdrawal of the lump sum payment.

Unrecognised Provident Fund Account

Particulars	Income Tax Provision
Employee Contribution	Deduction not allowed under Section 80C
Employer’s Contribution	Not taxed when initial contribution is made
Interest Income	Not taxed on annual accrual
Amounts received on retirement:	Taxability:
Employee contribution	Not Taxable
Interest on employee’s contribution	Taxable under ‘Income from other sources’
Employer’s contribution	Taxable under ‘Salary’
Interest on employer’s contribution	Taxable under ‘Salary’

Public Provident Fund Account

Particulars	Income Tax Provision
Contribution	Deduction allowed under section 80C
Interest Income	Exempt

Conclusion

It's critical to comprehend how your Provident Fund (PF) interest and contributions are taxed in order to optimise your savings and reduce your tax obligation. With higher limitations for employer contribution tax exemptions and tax-free interest on contributions, the previous tax laws provided more advantageous circumstances. Complying with TDS requirements for EPF withdrawals guarantees compliance and helps prevent unforeseen income tax deductions. Employees can better plan for their financial future and maximise their PF benefits by being aware of these factors.

FAQs

Q1. What are the three schemes under the Employee’s Provident Fund & Miscellaneous Provisions Act 1952?

The three schemes under the Act are:

Employee Provident Fund Scheme: This is a retirement savings and accumulation program for employees.
Employee's Pension Fund Scheme: this plan provides a monthly pension to employees upon their retirement.
Employee's Deposit Linked Insurance Plan: This plan offers assurance benefits in the event that an employee passes away while still employed.

Q2. Is the employer’s contribution to PF taxable?

Up to 12% of the employee's pay, the employer's contribution to the Provident Fund (PF) is tax-free. Above this threshold contributions are included in the employee's income and subject to appropriate taxation.

Q3. How can I apply for an EPF withdrawal tax exemption?

Make sure you fulfil the requirements of finishing five consecutive years of service in order to be eligible for tax exemption on EPF withdrawals. Additionally, the withdrawal must be made for approved purposes, such as retirement, urgent medical needs, or particular purchases.

Q4. Is any TDS applicable on the withdrawal of the EPF balance?

Yes, if PF is withdrawn before five years of service, 10% of the amount is withheld at the source. Nevertheless, no TDS is withheld if the withdrawal is for less than Rs. 50,000.

Q5. What happens to my PF balance if I switch my job?

Following certain procedures, the amount of the PF account is also moved to a plan account that is kept up to date by the new employer.

Q6. What is the PF interest rate and is it subject to taxes?

Every year, the government sets the interest rate for the Provident Fund (PF). If the employee works for five years in a row without missing any days of work, the interest they earn is tax-free.

Q7. What is Employees Provident Fund Organisation (EPFO)?

The retirement plan for employees in India is managed by the EPFO and consists of three main programs: a basic pension plan, a disability/death insurance plan, and the required provident fund. It oversees the management of international social security agreements as well.