Gratuity

Provident fund and it’s treatment in Income Tax

A provident fund is a compulsory, government-managed retirement savings scheme used for the benefit of employees.

Employees give a portion of their salaries to the provident fund and employers must contribute on behalf of their employees. The money in the fund is then held and managed by the government, and eventually withdrawn by retirees or, their surviving families. In some cases, the fund also pays out to the disabled who cannot work.

Now as per the Income Tax provisions, considering the Provident fund in your income is very important.

So in this article you will learn about various treatments of Provident fund for Income Tax purpose.

Take a look at the table showing types of Provident fund schemes and their treatments:

ParticularsStatutory Provident FundRecognised Provident FundUnrecognised Provident FundPublic Provident Fund
Employee's/Assessee's ContributionDeduction u/s 80C is available Deduction u/s 80C is available No deduction u/s 80C available. Deduction u/s 80C is available.
Employer's Contribution Fully exempt from tax Exempt upto 12% of salary. Amount in excess of 12% is included in gross salary. Not exempt but also taxable every year. Not applicable
As there is only assessee's own contribution.
Interest on Provident FundFully exempt from taxExempt u/s 10 upto 9.5% p.a. Interest credited in excess of 9.5% is included in gross salary. Not exempt but taxable every yearFully exempt
Repayment of lump sum amount on retirement/resignation/termination Fully exempt u/s 10(11)Exempt subject to following conditions:
1. If the employee has rendered continuous service for period of 5 years or more;
2. If he has not rendered such continuous service of 5 years, but his service has been terminated by reason of employee's ill health or by discontinuation of employer's business or other cause beyond control of employee.
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 recognised fund maintained by such other employer.
Accumulated employee's contribution is not taxable. Accumulated employer's Contribution + interest on employer's Contribution(till date) is taxable as profit in lieu of salary. Interest on employees contribution is taxable as income from other sources. Fully taxable u/s 10(11)

So here is the question for you!

Which scheme is better for investing money as an employee?

Comment down below and share your thoughts!

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