The scheme of Provident Funds implies compulsory saving by the employees from their salary every month. The contribution at some stipulated rate is deducted from the salary by the employer who is also generally obliged to contribute some amount to the fund simultaneously in addition to paying regular salary. The combined amount is then invested in gilt edged securities or remitted to Provident Fund Commissioner or deposited in the bank to earn interest, which is again credited to the Provident Fund Account of the employees.
Thus the Provident Fund Account of any employee at any given time consists of the employer’s contribution, employee’s contribution and interest on both. This money is payable to the employee on his retirement or on his leaving of the service. In case of death the amount standing to his credit is paid to his legal heirs. Since the scheme is connected with savings, it is natural for the government to come forward with incentives of different kinds. The incentives concerning its tax liability are discussed here.
Types of provident Funds :
Statutory Provident Funds :
Statutory provident funds are managed and administered under the Provident Funds Act, 1925. They are found in institutions like Universities, Local bodies and Governments Departments. They are also known as Government Provident Funds.
Recognized Provident Funds :
These funds are recognized by the Commissioner of Income-tax for purposes of the Act. They are governed by the rules contained in part A of the Fourth Schedule to the Income-tax Act, 1961. Provident Fund governed by the Provident Fund Act, 1952 is also known as a Recognized Provident Fund, Recognized Provident Fund is found in banks, insurance companies, manufacturing and trading concerns etc. operating in private sector.
Unrecognized Provident Fund :
They are not granted recognition by the CIT and, therefore, these are known as Unrecognized Provident Funds.
Transferred Balance : This is the balance standing to credit or the employee in the Unrecognized Provident Fund on the date when it gets recognition for the first time. This balance is automatically transferred from the Unrecognized Provident Fund to the Recognized Provident Fund.
The amount of transferred balance is taxable to the extent of employer’s contribution and interest thereon and is included in salary. The employee’s own contribution is ignored because it has been taxed throughout as the fund was not recognized.
Approved Superannuation Funds :
Superannuation funds are created to give pension benefits to employees. They arc known as approved if they are kept in accordance with the rules contained in part B of the Fourth Schedule and approved by the CIT. The scheme is sometimes contributory when the employees are asked to contribute while at times only the employer may bear the whole burden.
a) As regards administration, the whole scheme may be entrusted to the LIC wherein periodical payments are made over and in return the Corporation undertakes to pay annuities to the employees on retirement, cessation of service or on death. The annuity may be paid annually, half yearly, or monthly depending upon preference of the incumbent.
b) The Superannuation Fund may also be administered privately by making trusts. In this case contributions are invested by the trustees in approved securities and interest is earned thereon. On the retirement etc., pensions are paid from this fund. Employee’s own contribution to the fund will qualify for rebate of income-tax at 20% u/s 88.
Public Provident Fund :
The Government has instituted a Public Provident Fund Scheme under the PPF Act, 1968, in order to mobilize personal savings. It provides a medium for long-term saving to all sections of the community particularly self employed persons. Membership of the fund is open to all individuals. Subscription during a year may range from a minimum of Rs. 100 to maximum of Rs. 60,000 and may be made in the multiple of Rs. 5 in as many installments as the subscriber chooses. But not more than once in a month. Subscriptions are received at all the offices and branches of the State Bank of India and its subsidiaries. The scheme is in force with effect from July 1, 1968. The balance in this account earns a lax free interest at rates prescribed by the Government from time to time. One may get back the amount any time after 15 years form the end of the financial year in which the account is opened. The balance in the Public Provident Fund account is not attachable,
a) An individual participating in the Public Provident Fund is eligible for the same tax concessions as are available to participants in Government Provident Funds. Thus contributions made to it qualify for rebate of tax u/s 88 along with savings through other specified media, namely life insurance premium, CTD in Post Office etc., subject to the existing overall qualifying limits. Any amount received from the Fund is also exempt from income lax in the hands of the recipient in the same manner as in the case of amounts received from Government Provident Funds,
b) In case the employee is compelled to resign on account of circumstances created by the employer, then such a resignation would for all practical purposes be regarded as termination of service by the employer. Ratra v CIT (1986) 161 ITR 251 (Raj), Refund from RPF will, therefore, not be taxable in such cases even, when the employee leaves employment before completing five years.