Types Of Provident Fund In India
Various Types Of Provident Fund Where You Can Invest
Do you know that apart from EPF (Employees Provident Fund) and PPF (Public Provident Fund), there are two more Provident Funds? Do you know that the tax treatment of all the Provident Fund schemes are different from each other? Do you know that these four different Provident Funds provide at least one investment tool to create retirement fund for entire population? In this article, I am going to tell you the key points of every Provident Fund available in India.
There are four different types of Provident Funds which can be used by an individual for investment and saving purposes. The rules related to subscription, withdrawal and taxability of different Provident Fund schemes vary. These depend on the type of Provident Fund which you are using. First of all, we will understand what are the names of these Provident Funds and who can subscribe them.
1. Statutory Provident Fund or General Provident Fund (SPF/GPF)
SPF/GPF are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc. It means that SPF/GPF is meant for government employees or employees of Universities or Educational Institutes affiliated to University. Only employees working in such organisations can subscribe SPF/GPF.
2. Recognized Provident Fund (RPF)
Recognised Provident Fund (RPF) is recognised by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952. Any business entity which has 20 or more employees can join RPF. Employees Provident Fund i.e. EPF is, in fact, a RPF. Most of the salaried individuals generally subscribe to the EPF. Though, organizations which has less than 20 employees can also join RPF, if the employer and employees want to do so. Also, the business entity can either join the Govt. scheme i.e. EPF or the employer himself can manage the scheme by creating a PF Trust. All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax.
3. Unrecognized Provident Fund (UPF)
These are not recognized by Commissioner of Income Tax or Provident Fund Commissioner. The employers and employees start these schemes with their consent.
4. Public Provident Fund (PPF)
Unlike other Provident Fund scheme, PPF is open for all residents. Whether salaried or self-employed, any one can take part in this scheme. A minimum of Rs.500 is required to open a PPF account and the maximum that can be deposited is Rs.1.5 lakh. A deposit more than Rs. 1.50 lakh per annum will not earn any interest. Also, investment more than 1.5 lakh per annum will not be eligible for rebate under income tax. PPF can serve as an excellent retirement planning scheme for those who do not come under any pension scheme.
Difference between PPF and Other PF Schemes
There are some differences between PPF and other provident fund schemes, which you should know.
- The individual needs to be salaried to be able to contribute to SPF/GPF, RPF or UPF. But PPF allows both self-employed and salaried individuals to make a contribution.
- Only the individual contributes to the fund in Public provident fund (PPF) account. But in other provident funds both employer and employee can contribute.
- In Public provident fund, amount can’t be withdrawn before the completion of 15 years. But in other types of provident fund schemes, the amount can be withdrawn before its completion when fulfilling certain conditions.
Tax Treatment of Various Provident Funds
There are various sections of the Income Tax Act which covers the tax treatment of the Provident Funds. These tax rules apply on subscription, interest earned and withdrawal of the amount in PF schemes. A few of these sections are Section 10(11), 10(12) and 80(C) of the Income Tax Act. We will go through the tax rules of these PF schemes one by one.
1. Tax Treatment of SPF/GPF
- The contributions made by the employer are not taxable in the year in which contributions are made.
- The employee’s contributions can be claimed as tax deductions under section 80(C) of the Income Tax Act.
- Interest amount credited during the financial year is exempted from income tax.
- The redemption amount at the time of retirement is also exempted from tax.
- If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.
2. Tax Treatment of RPF
- Employer’s contribution to 12% of salary is exempt. But if the contribution is more than 12% of salary, exceeded amount is treated as income of the employee and is taxable.
- Employees’ contribution can be claimed as tax deduction under section 80(C) up to Rs 1.5 Lakh in a Financial Year.
- Interest amount earned (up to 9.5% interest rate) on PF balance (employee’s + employer’s contributions) is tax free. In excess of 9.5%, the interest on contributions is added as income from salary.
- At the time of retirement, accumulated funds redeemed by the employee are exempt from tax.
- If amount is withdrawn after resignation (but before retirement), it will be exempt from tax subject to fulfilling certain conditions. These are: Employee leaves the job after 5 years of job; or s/he leaves the job because of discontinuance of employer’s business or her/his ill health.
If you want to know whether or not you should withdraw EPF after leaving the job, read this:- PF withdrawal after leaving the job: Yes or No?
3. Tax Treatment of UPF
- Employer’s contribution is not taxable in the year of investment.
- Employees contributions will not get tax deduction under section 80(C).
- Interest earned is also not taxable.
- At the time of redemption/retirement, the employer’s contributions and interest thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.
4. Tax Treatment of PPF
- Subscriber’s contribution can be claimed as deduction under section 80(C) up to Rs. 1.5 lakh per annum.
- Interest earned on the subscription amount is exempt from income tax.
- Amount withdrawn at the maturity is also exempt from income tax. Remember that you can’t withdraw the amount before completing 15 years. But if you want to remain invested, you can do so by extending the scheme in block of 5 years.
After going through all these rules of tax treatment, we can rank the provident fund schemes in following order. This ranking is according to the tax liability and ease of investment in these schemes.
I hope that this article will help you to know more about the retirement investment plan in our country. If you have any question or doubt about the provident fund schemes, please let me know. I will reply you as soon as possible.