Provident Fund (PF) - Meaning, Definition, and Types of Provident Fund

Contents

Provident Fund – Meaning

The provident fund scheme is basically a retirement benefit scheme. Under the scheme, employee contributes a part of his salary and employer pays fixed sum, say 10% or 12% of salary of employee to the provident fund. The sum so received by the fund is invested in securities etc. and income of the fund is credited to members A/c as interest on his and employer’s contribution. On retirement, superannuation or termination of employee total contribution of employee and employer along with interest is paid to employee.

Types of PF –

Provident funds are following four types:

1. Statutory provident fund

2. Recognized provident fund

3. Unrecognized provident fund

4. Public provident fund.

(a) Provisions regarding Statutory Provident Fund –

The scheme of SPF is applicable to employees of government, semi-government institutions, local authority, universities etc.

Any interest earned on contribution of employee and employer etc. is wholly exempt from tax. Any amount received on retirement is wholly exempt from tax. Contribution of employee is eligible for deduction for U/s 80C.

(B) Provisions regarding Recognised Provident Fund:

A provident fund scheme to which the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 applies is recognized provident fund.

In this regard provisions are as follows:

1. Contribution of employer is exempt up to 12% of salary (i.e. basic and dearness allowance if under terms of employment and commission on fixed % of turnover) thereafter, any excess is taxable.

2. Interest credited to the RPF is exempt up to 9.5% p.a. excess interest credited over 9.5% is taxable.

3. Exemption U/s 80C is available to employee on his contribution.

4. The accumulated balance due and becoming payable to an employee participating in a RPF will be excluded from total income in the following situations:

(i) In the case of an employee who has rendered continuous service with his employer for a period of 5 years or more.

(ii) In case of an employee whose service has been terminated by reason of the employee’s ill health or by the contraction or discontiuance of the employer’s business or other cause beyond the control of the employee.

(iii) In case of an employee who transferred his balance from one employer to other, total period will be considered for calculating the period of continuous service.

(c) Provisions regarding Unrecoznised Provident Fund.

1. In salary income of the person contributions made by employer are not added.

2. Interest credited to the fund is also exempt at the time of credit.

3. No exemption U/s 80C is available to the employee.

4. On retirement etc. payment received which represent employee’s own contribution is exempt. Interest received on employee’s contribution is taxable under income from other sources’. Balance (employer’s contribution and interest thereon) is taxable under the head salaries.

(d) Provisions regarding Public Provident Fund:

The Central Government has established the public provident fund for the benefit of general public to mobilize personal savings. Any member of public (whether a salaried employee or a self- employed person) can participate in the fund by opening a provident fund account at the State Bank of India or its subsidiaries or other nationalized banks. Any amount (subject to minimum of Rs. 500 and maximum of Rs. 1,50,000 p.a.) may be deposited under this account. The accumulated sum is repayable after 15 years. (it may be extended).

Key Features of the Public Provident Fund:

These are as under

(a) Own contribution is fully taxable.

(b) Employers contribution is not available in case of public provident fund.

(c) Interest credited to the fund annually is fully exempted from tax.

(d) Deduction U/s 80C is available.

(e) Lump-sum amount withdrawn from the fund is fully exempted.

This scheme is open to all whether salaried or business persons or else. It can also be available in addition to SPF, RPF or UPF. The person should open a PPF account in any nationalized Bank. He can deposit any amount in the multiple of Rs. 5, minimum deposit being Rs. 500 p.a and maximum being Rs. 1,50,000 p.a., Duration of PPF scheme is 15 years.

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