There are various types of provident funds.
Based on their types, the tax treatment differs for each fund.
I have explained the each provident fund treatment in below table
|Particulars||Statutory PF||Recognized PF||Unrecognized PF||PPF|
|Constituted under||Provident funds act ,1925||EPF and Misc. provision act,1952 7 recognised by commissioner of PF and CIT||Not recognized by commissioner of income tax||Public provident fund ACT ,1968 account in SBI or post offices|
|Contributed by||Employer and employee||Employer and employee||Employer and employee||All assesses independently|
|Employer’s contribution||Fully exempt||Exempt upto 12% of salary, any excess is taxable||Not taxable at the time of contribution||Not applicable|
|Employee’s contribution||Deduction u/s 80C||Deduction u/s 80C||Not income tax benefit||Deduction u/s 80c|
|Interest credited||Fully exempt||Exempt upto 9.5% p.a. any excess is taxable||Not taxable at the time of contribution||fully exempt|
|Withdrawal at the time of retirement||Exempted u/s 10(11)||Exempt u/s 10(12) subject to condition.||Employee’s contribution is not taxable but interest thereon is taxable under income from other sources.
Employer contribution and interest theron is taxble as profit in lieu of salary ,under ‘salaries’
|Exempted u/s 10(11)|
Note: Due to COVID-19 pandemic, the employer’s and employee’s rate of contribution is reduced from 12% to 10% of (basic wages+dearness allowances) for the month of May, June, July 2020.
But this change is not applicable for the enterprises governed or controlled by Central and State Government including enterprises eligible for Pradhan Mantri Garib Kalyan Yojana (PMGKY).
Tax Treatment For Contribution Towards PF
To allow deductions for the employers contribution the following condition needs to be fulfilled [Section 36(1)(IV)]
- The provident fund should be a Recognized provident fund (In case of Unrecognized provident fund the employer is not eligible for deduction)
- The conditions of section 43B should be fulfilled.
As per section 43B, deduction is allowed if the sum payable by way of contribution to Recognized provident fund is deposited by him before the due date (due date of depositing PF as per the PF act) and
Where the amount is paid by the employer on or before the due date of filing the income tax return as per section 139(1), then deduction will be allowed for the previous year in which the liability was incurred
Example: Say the due date of filing returns as per section 139(1) is 30th September 2020.
Case1: Payment is made before 30th September then the deduction will be allowed for the previous year 2019-20.
Case 2: The payment is made after 30th September then the deduction will be allowed for the previous year 2020-21.
Some employers were deducting an amount in the name of certain funds from employees salary and not depositing the same in the name of employee.
To stop this malpractice, section 36(1)(va) was introduced.
Under this section, any amount deducted from employee’s salary as his contribution toward PF or any other fund, the same is treated as income in the hand of employer.
However, if the amount so deducted is deposited in the name of employee on or before due date, the same is allowed as deduction for employer.
Provision section 43B is not applicable to employees contribution.