Legal AdviceProvident Fund

What Is a Recognised and Unrecognised Provident Fund?

An EPF is a retirement plan for employees. It is a statutorily mandated benefit for retiring or departing workers. Benefits are paid to a dead employee's dependents.Employers and employees are both required to contribute to the EPF Scheme.

People save money in several different types of provident fund (PF) accounts. Also, the rules for paying income taxes on PF contributions, withdrawals, and earnings depend on the type of PF account. Let’s talk about the different kinds of funds and how taxes work with them.

Funding Sources:

Contribution of the Employee:  The amount taken out of an employee’s pay at a rate between 2% and 15%.Contribution of the employer: In addition to paying the employee’s salary to the employer, the employer will also put between 2% and 15% of the employee’s salary into the fund. It is also part of the employment welfare system.

When money is put into a fund, it will be managed by an investment management company according to a set investment policy. The goal is to obtain the maximum potential return for an acceptable level of risk.

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What Is a Provident Fund?

The provident fund is a separate legal entity from both the employer and the investment management company. It is Securities and Exchange Commission-registered (SEC). So, employees who are members of a  fund can be sure that if their employer or the company that manages their investments goes bankrupt, the fund’s assets will not be affected by any debts that the employer or the company that manages their investments may have.

Use Vakilsearch’s PPF calculator to estimate the investment value of your Public Provident Fund (PPF) and learn how to reduce your tax liability.

Different Kinds of Provident Funds

People can use different kinds of provident funds to invest or save regularly for retirement. Here’s what they are:

Statutory Provident Fund 

The Provident Funds Act of 1925 made this plan possible. It is for people who work for the government, for universities and other recognised educational institutions, for the railways, and so on. The General Provident Fund is another name for it (GPF). The government changes the interest rates on general funds from time to time. The general provident fund is not available to people who work in the private sector.

Recognised Provident Fund 

The Provident Fund Act of 1952 is used by all businesses with 20 or more workers. The places covered by the scheme can either apply for the government-approved scheme or start their own PF scheme by forming a trust. The businesses can join the PF Act 1952 scheme, which is a recognised fund and is approved by the government. 

The employer and employee of the business can also create a provident fund scheme by forming a trust. Funds are then invested according to the rules set out in the PF Act of 1952. For the scheme to become a recognised provident fund, the commissioner of income tax must agree to it.

Tax on Recognised Provident Fund

When it’s more than 12 percent, an employer’s contribution to a fund is taxed. Tax is taken out of what an employee puts into a provident fund. If the interest rate on the fund is higher than 9.5%, tax will be taken out. The retirement payment won’t be taxed if any of these things happen:

  • If the employer worked for the same company for at least five years in a row
  • If the employee was fired for reasons like health problems, the employer going out of business, etc., the employee has a right to a hearing
  • If the employee quits and later comes back to the same company
  • If the employee’s entire credit balance is moved to his or her account as part of a pension plan under section 80CCD.

Unrecognised Provident Fund 

If the commissioner of income tax does not approve the fund scheme made by the employer and employee (as mentioned above), then it is an unrecognised fund scheme.

Tax on Unrecognised Provident Fund 

The money an employer puts into a provident fund is not taxed. When these things happen, the retirement payment is taxed:

  • The employer’s contribution and interest payments are taxed under the heading ‘Salaries.’
  • The interest earned on an employee contribution is taxed as ‘income from other sources.’
  • The employee’s contribution is not taxed when they get a payment for it.

What’s the Difference Between a Recognised Provident Fund and an Unrecognised Provident Fund?

Recognised Provident Fund

The Employees’ Provident Fund and Miscellaneous Provisions Act of 1952 governs recognised provident funds. The following regulations apply in this regard:

  1. An employer’s contribution is tax-free up to 12 percent of a worker’s salary (basic pay, dearness allowance if it’s part of the job, and commission based on a fixed percentage of sales). After that, the rest is taxed
  2. Interest put into the RPF is not taxed up to 9,5% p.a. Any interest paid that is more than 9,5% is taxed
  3. Employees can get a tax break based on their contributions under section 80C
  4. The total income of an employee who is part of an RPF will not include the accumulated balance that is due and will be paid to the employee in the following situations:

(i)In the case of an employee who has worked for the same employer for at least 5 years in a row

(ii) In the case of an employee whose service was ended because of the employee’s illness, the employer’s business going out of business, or something else that was out of the employee’s control

(iii) In the case of an employee who moved his balance from one employer to another, the total period will be used to figure out his pension.  

Unrecognised Provident Fund

  1. Employer contributions are not added to the person’s salary income
  2. When interest is added to the fund, it is not taxed
  3. No exemption The employee can use U/S 80C
  4. The employee’s own contribution is not taxed when they retire or leave their job. The interest an employee gets on the money they put in is taxed as income from other sources. The balance, which includes the employer’s contribution and any interest on it, is taxed under the head salaries.

Public Provident Fund

The government has established a fund to assist citizens in saving for the future. Anyone can put money into this plan by opening a public provident fund account at a bank that is allowed to do so. The person can put down between 500 and 1,50,000.You can take the entire balance from your PPF account after 15 years.

Public Provident Fund Taxes

The money an employer puts into a  fund is taxed. The interest paid into the fund as well as the retirement payment are not taxed.

Contact Vakilsearch’s specialists to learn more about the various forms of provident funds and the related taxes. Experts will assist and guide you throughout the process.

Read more:

  1. How Can Your Company Register for EPF?
  2. How do I obtain an online EPF Registration Certificate?
  3. How to Create a UAN for a PF Account
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