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Provident Fund (PF) is one of the most popular retirement plans in India. If you are planning to invest in PF, you must know the provisions of tax* on Provident Fund contributions.
The retirement age in most countries is capped at 60. However, life does not end here. In fact, you can get to live a new life post-retirement. However, you need to deal with a lot of challenges, especially financial ones, once you retire from active employment.
This is where the provident fund (PF) shines as one of the highly sought-after retirement plans. Not only does it allow you to live your post-retirement life in a stress-free way, but it also helps you live an independent life free of financial struggles.
When making investments in a provident fund, most individuals stumble upon one question — what are the implementations of tax* on PF?
If you are also worrying about the same, this blog is for you. We will explain tax on PF contributions along with discussing provident fund exemptions from the Income Tax section.
What is a Provident Fund in Income Tax?
Provident Fund is a popular retirement plan that is used to provide one-time or regular payments to employees once they retire. It is basically a fixed amount of money contributed by the salaried employees till they reach their retirement date.
Types of Provident Funds
Before discussing the PF deduction in income tax, it is important to understand various types of Provident Funds. Following are the different types of Provident Funds used by employees for retirement savings:
Statutory Provident Fund:
This PF scheme is laid under the Provident Funds Act of 1925. Also referred to as the General Provident Fund, it is meant for employees of educational institutions, universities, government employees, etc. Note that the private sector employees are not eligible for this PF scheme.
Public Provident Fund:
As the name suggests, this PF category is meant for the general public. Anyone can start investing in this scheme by opening a PPF account in a recognised bank. Further, the deposit amount in PPF can range from as low as ₹500 and go up to ₹1,50,000.
Note that PPF accounts come with a lock-in period of 15 years, after which the corpus can be withdrawn without any tax implication.
Recognised Provident Fund:
The PF Act, 1952, is applicable to all organisations with 20 employees or more. Under this scheme, the eligible organisations can either use a government-approved PF scheme or launch their own PF scheme by creating a trust.
The government-approved scheme laid under the Provident Fund Act 1952 is a recognised PF scheme. However, if any organisation wants to use its own PF scheme, they need to get it approved by the income tax commissioner. Only after this approval, the PF scheme is accepted as a recognised scheme.
Unrecognised Provident Fund:
In case the income tax commissioner disapproves of the PF scheme launched by the company, the scheme is labelled as an unrecognised Provident Fund.
Tax on PF Contribution: Understanding Tax on Different Types of Provident Funds
Now that you have understood the various types of provident Funds let us take a look at tax implementations on all these types:
Statutory Provident Fund
Particulars |
Tax Implementations |
Employee’s Contribution |
Eligible for deductions under the Section 80C of the Income Tax Act |
Employer’s Contribution |
Exempt from tax |
Interest Earned |
Exempt from tax |
Post Retirement |
No tax on provident fund withdrawal post-retirement |
Public Provident Fund
Particulars |
Tax Implementations |
Employee’s Contribution |
Eligible for tax deductions under Income Tax Act Section 80C |
Interest Earned |
Exempt from tax |
Recognised Provident Fund
Particulars |
Tax Implementations |
Employee’s Contribution |
Eligible for tax deductions under Income Tax Act Section 80C |
Employer’s Contribution |
Exempt from tax up to 12% of Salary (Basic pay + Dearness Allowance) |
Interest Earned |
Exempt from tax up to 9.5% per year |
Withdrawal Due to the Following Reasons:
|
The lump sum amount received by the employee is free from tax. |
Withdrawal before completing 5 years of continuous employment and not due to the above-mentioned reasons |
The lump sum amount is taxable as per the given tax rates:
|
Unrecognised Provident Fund
Particulars |
Tax Implementations |
Employee’s Contribution |
No tax deduction |
Employer’s Contribution |
Exempt from Tax |
Interest Earned |
Exempt from Tax |
Different Types of PF Withdrawal on Retirement: |
|
Employee’s Contribution towards PF |
— |
Interest Gain on Employee’s Contribution |
Taxed under the heading “income from other sources.” |
Employer’s Contribution towards PF |
Taxed under the heading “Salary.” |
Interest Gain on Employee’s Contribution |
Taxed under the heading “Salary.” |
Final Thoughts
Understanding the provident fund tax is crucial for effective retirement planning. Although the contributions and interests earned on the provident fund offer tax benefits, tax liability at the time of withdrawal can vary based on factors such as purpose and time of withdrawal.
To navigate the PF deductions in income tax smoothly, stay informed regarding the latest tax regulations in the country and consult a trusted advisor before making any final decision. It will help you reap the most benefits from your investment plans, especially retirement plans, while reducing your tax liabilities.
