Tax provisions for Employee Provident Fund contribution in India

Employee Provident Fund is a retirement scheme. Credit balance in the employee provident fund includes employee’s contribution, interest on employee’s contribution, employer’s contribution and interest on employer contribution.

The sum that is accumulated through EPF is paid at the time of termination or resignation.

In this article we will be discussing different income tax provisions related to provident fund contribution as per income tax act 1961 of India.

Income tax on Provident Fund contribution as per IT Act 1961

If the provident fund is managed under Statutory Provident Fund

Particulars Tax Provisions of Provident Fund
Employee’s Contribution to Provident Fund (PF) Allowed as a deduction under section 80C of the Income tax Act, 1961 subject to the limits specified there in (Note – 2)
Employer’s Contribution to Provident Fund, Interest accumulated and repayment of lump sum amount on retirement/resignation/termination Fully exempt under the Income tax Act

If the provident fund is managed under Recognized Provident Fund

Particulars Tax Provisions of Provident Fund
Employee’s contribution to Recognized Provident Fund Allowed as a deduction under section 80C of the Income tax Act, 1961 subject to the limits specified there in (Note – 2)
Employer’s Contribution to Recognized Provident Fund Contribution in excess of 12% of salary is included in gross salary and taxable accordingly.
Interest on recognized Provident Fund Exempted up to 8.5% per annum. Interest in Excess of 8.5% will be taxable.
Repayment of lump sum amount on retirement/resignation/termination Exempted subjected to conditions under Note 1

Note 1: The accumulated balance due and becoming payable to an employee participating in a recognized provident fund shall be exempted in following cases:

  1. If the employee has rendered continuous service with his employer for a period of 5 years or more or
  2. If he has not rendered such continuous service of 5 years, the service has been terminated
    • By reason of such employee’s ill health or
    • By the contraction or discontinuance of the employer’s business or
    • Other cause beyond the control of the employee

    Or

  3. If on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognized fund maintained by such other employer.

However in a situation mentioned under clause (iii) above for calculating period of service for clause (i) and (ii) above the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall also be included.

Note 2: The maximum amount that is deductible under section 80C of the Income Tax Act, 1961 is Rs. 1, 50, 000.

Contribution to Unrecognized Provident Fund

Contribution to this unrecognized provident fund and interest accumulated on this fund will not get any tax benefit.

At the time of repayment of lump sum amount on retirement/ recognition/ termination:

Particulars Tax Provisions of Provident Fund
Accumulated employee’s contribution Not taxable
Accumulated employer’s contribution and interest on employer’s contribution Taxable as profit in lieu of salary
Interest on employees contribution Taxable as income from other sources

Contribution to Public Provident Fund

Particulars Tax Provisions of Provident Fund
Employee’s contribution to the fund or contribution made by Self employed person Allowed as a deduction under Section 80C of the Income Tax Act, 1961
Interest on Provident Fund and repayment of lump sum amount on retirement/resignation/termination Fully Exempt under section 10 (11) of the income tax act, 1961.

Salary for the above purpose includes dearness allowance if the terms of the employment so provide but excludes all other allowance and perquisites. Commission allowed as a fixed percentage of the turnover achieved by the employee will also be part of the basic salary for the purpose of provident fund.

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