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What Is the Difference Between a Tax Rebate And a Tax Refund?

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    Note that PPF accounts come with a lock-in period of 15 years, after which the corpus can be withdrawn without any tax implication.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:

  • Poor health
  • PF account transfer to a new company.
  • Shutdown of employer’s company.
  • Withdrawal after completing five years of service.

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:

  • TDS @10% if PF withdrawal amount is more than ₹50,000.
  • No TDS if the withdrawal amount is less than ₹50,000.

 

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.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

Is there any limit on tax deductions for PF contributions?

Yes, the current limit for tax deductions under Section 80C is ₹1,50,000. This limit is applicable to PF as well.

What documents are required to withdraw the PF amount?

At the time of PF withdrawal, you may need to submit documents such as PAN and Form 15H/15G.

Is it possible to transfer the PF account balance from one employer to another without paying taxes?

Yes, there is no tax liability for transferring PF accounts from one employer to another.

What tax category is the provident fund?

In India, the Provident Fund (PF) falls under the category of the Exempt-Exempt-Exempt (EEE) scheme. It means that the investments, returns, and withdrawals on PF accounts are generally tax-free. However, there are certain circumstances under which PF can be taxed. Thus, it is advisable to stay updated regarding the tax regulations on PF.

Disclaimer

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to the Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication. However, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • Tax: * Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.