Income Tax on PF ( Provident Fund ) for Various Types of PF Account

In India, there are various types of provident fund (PF) accounts that individuals can use to save. The income tax rules for PF contribution, withdrawal and taxability of income on PF vary depending on the type of PF account. Let us understand the various type of provident funds and their tax implications in this blog. The blog will throw light on the following aspects:

• Types of Provident Funds.
• Explanation of Employees' Provident Fund
• Tax Treatment of various types of Provident Funds
• Applicable Amendments

Types of Provident Funds

There are different types of provident funds utilised by a person for investment or regular savings for retirement. They are as follows:

• Statutory Provident Fund – This scheme is set up under the Provident Funds Act, 1925. It is meant for government employees, universities, recognised educational Institutions, railways, etc. It is also known as the General Provident Fund (GPF). The government revives the interest rates of general provident funds from time to time. Private sector employees are not eligible to contribute to the general provident fund.
• Recognised Provident Fund – The Provident Fund Act, 1952 (PF Act) applies to all establishments employing 20 or more employees. The establishments covered under the scheme can join the government-approved scheme or start their own PF scheme by forming their trust. The establishments can join the government-approved scheme set up under the PF Act 1952, a recognised provident fund. Alternatively, the establishment’s employer and employee can create a provident fund scheme by forming a trust, and funds are invested as per rules prescribed under the PF Act, 1952. The commissioner of income tax must approve the trust/scheme to receive the status of the recognised provident fund.
• Unrecognised Provident Fund – If the commissioner of income tax does not approve the provident fund scheme created by the employer and employee (as mentioned above), then such scheme is an unrecognised provident fund scheme. Certain tax benefits are restricted only to Recognised PFs.
• Public Provident Fund – As the name suggests, this fund was established for the general public. Any person can contribute to this scheme by opening a public provident fund account with the authorised bank. The person can deposit an amount starting from Rs.500 to Rs.1,50,000 per annum. The corpus of the PPF can be fully withdrawn after the completion of 15 years.

Employees' Provident Fund(EPF)

EPF, or Employees' Provident Fund, is a well-known provident fund scheme. You must have also heard about this scheme being discussed in salary-related matters. It is widely adopted by private sector organisations employing 20 or more individuals.

The rate of returns on the balance held in an individual's EPF account is contingent on the prevailing interest rate. For 2023-24, the interest rate on EPF stands at 8.25% per annum. You can refer to the EPF Calculator as well.

Under the EPF scheme, both the employer and the employee make monthly contributions to the employee's account, usually in equal proportions. The specific percentage of contributions and the corresponding accounts they are allocated to vary based on the employee's salary.

For individuals with a salary of ₹15,000 or lower, the EPF contributions are distributed as follows:

1. Employee contribution to EPF: 12% of the Basic Salary + Dearness Allowance.
2. Employer contribution to EPF: 3.67% of Basic Salary + Dearness Allowance.
3. Employer contribution to Employee Pension Scheme (EPS): 8.33% of Basic Salary + Dearness Allowance. It is capped at a maximum of Rs. 1,250 per month (ceiling amount), so any additional contribution will be invested in EPF. It is also to be noted that no interest is earned on the amount contributed to EPS.

This allocation ensures that 12% of the employee's salary goes towards the EPF, while the employer contributes 3.67% to the EPF and 8.33% (up to Rs. 1,250) to the EPS.

For individuals with a salary exceeding ₹15,000, the EPF contributions are distributed as follows:

1. Employee contribution to EPF: 12% of Basic Salary + Dearness Allowance.
2. Employer contribution to EPF: 3.67% of Basic Salary + Dearness Allowance.
3. Employer contribution to EPS: A fixed amount of Rs. 1,250.
4. Additional employer contribution to EPF: The remaining amount (calculated as 8.33% of the Basic Salary + Dearness Allowance less Rs. 1,250)

This distribution ensures that the employee contributes 12% of their salary to the EPF, while the employer contributes 3.67% to the EPF, Rs. 1,250 to the EPS and the remaining balance (i.e., 8.33% of the Basic Salary + Dearness Allowance minus Rs. 1,250) to the EPF.

Tax Treatment for Various Types of Provident Funds

Statutory Provident Fund Account

Amendment: With Effect from April 1, 2021, 

If a contribution made by a person (other than the contribution made by the employer) to the Statutory Provident Fund Account exceeds Rs. 2.5 lakhs in a year, the amount of interest earned on the contribution in excess of Rs. 2.5 lakhs will not be exempt; it will be taxable, and tax on such interest income will be payable on withdrawal of a lump sum amount. 

If the employer does not contribute to the Statutory Provident Fund, the limit is kept at Rs. 5 lakhs in a year. If the contribution is in excess of Rs. 5 lakhs, the interest on the excess contribution will not be exempt, and tax on such interest income will be payable on withdrawal of the lump sum amount. 

Recognised Provident Fund Account

Amendment: With Effect from April 1, 2021, 

If a person's (other than the employer's) contribution to the Recognised Provident Fund Account exceeds Rs. 2.5 lakhs in a year, the amount of interest earned on the contribution in excess of Rs. 2.5 lakhs will not be exempt; it will be taxable, and tax on such interest income will be payable on withdrawal of the lump sum amount. 

If the employer does not make any contribution to the Recognised Provident Fund, the limit is kept at Rs. 5 lakhs in a year. If the contribution is in excess of Rs. 5 lakhs, the interest on the excess contribution will not be exempt, and tax on such interest income will be payable on withdrawal of the lump sum amount. 

Unrecognised Provident Fund Account

Public Provident Fund Account 

For more details on PPF, refer article.