Provident Fund and Types of Provident Fund
What is Provident Fund(PF)?
Provident fund is government managed fund retirement savings. Employee contribute portion of his/her savings. Provident Fund is a support scheme for retirement. This scheme is provided by the Employment Provident Fund Organization (EPFO). All the companies having more than 20 members are eligible to apply for the EPF scheme.
Amount gets deducted from employee’s salary; it’s called employees contribution. And, the employer contributes some portion besides salary paid to employee; it’s called employers contribution.
This invested amount is managed by government. Employee receives lump sum amount at the retirement or end of employment.
Also Read: Best Investment Options for Senior Citizens
What are types of Provident Fund?
There are 4 types of provident fund depending on the various conditions of taxes and their implications.
- Statutory Provident Fund
- Recognized Provident Fund
- Unrecognized Provident Fund
- Public Provident Fund
Statutory Provident Fund
It is set up under the provisions of the Provident Funds Act, 1925. Statutory Provident Fund is managed by the Government and Semi-Government organizations, local authorities, railways, universities and educational institutions.
Tax on Statutory Provident Fund
Tax is exempted on employer’s contribution. Tax is deducted on employee’s contribution. Interest credited to the provident fund and the retirement payment are tax exempt.
Recognized Provident Fund
An organization of 20 or more members shall invest funds as per the guidelines of PF Act, 1952. CIT (Commissioner of Income Tax) must approve schemes which is set up by employer for their contribution in their own PF trust account or PF commissioner system.
Tax on Recognized Provident Fund
If the employee’s contribution is more than 12%, it will be taxed for the year in which the contribution was made. Tax is deducted under Section 80B for the share of employee contributions. At the time of redemption, the total amount is exempt from tax only if the employee has worked continuously for five years.
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Unrecognized Provident Fund
The provident fund that is not recognized by Commissioner of Income Tax (CIT) is known as an unrecognized provident fund.
Tax on Unrecognized Provident Fund
Employer’s contribution in this unrecognized provident fund is exempt from tax. Payment received is taxable as “salary income” at the time of withdrawal. Employee contributions are not taxed under this section., but other taxes are assumed for them.
Public Provident Fund (PPF)
PPF is established by the Central Government. Anyone, either salaried employee or a business employed person can invest by opening a PF account at the State Bank of India or other nationalized banks.
Minimum Rs.500 and maximum of Rs1,50,000 per annum can be deposited under PF account. A certain sum of Interest is credited every year, which can be redeemed after 15 years.
Tax on Public Provident Fund
An employer’s contribution towards provident fund is taxable. The interest credited to the provident fund and the retirement payment are tax free.
What are the benefits of PF?
- Tax-free and Long-term: Everyone wants to save tax. Provident Fund is one option to save tax. These provident funds provide an escape and an excellent method for long-term secured financial savings.
- Emergencies: Amount can be withdrawn before pre-maturity for any emergencies like an accident, health issues and others.
- Death: In the unexpected cases of the death of the employee, the saved amount can be a relief to their family.
- Insurance and Pension: The life insurance of the employee and getting the interest amount as pension act as the added benefits of the Provident fund’s scheme.
- UAN Number: The UAN Number is a 12-digit number. UAN makes PF transactions simplified, manages all PF accounts in one place, irrespective of how many employers you many have had during employment journey.
When can I withdraw full PF amount?
An individual’s PF amount can be withdrawn either completely or partially. To withdraw said amount completely, the individual needs to be either retired or be unemployed for a period of more than two months.
Can we claim partial amount from PF?
EPF is a long-term retirement savings scheme. The full money can be withdrawn only after retirement. Partial withdrawal from EPF accounts is permitted in the case of an emergency such as medical emergency, house purchase or construction, and higher education.
