Tax on Provident Funds in India

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Nov. 23 – India’s Provident Fund (PF) is a clear payment arrangement – where each employee contributes 12 percent of their pay on a monthly basis and the individual’s employer is accountable for an equal contribution – out of which a part is remitted towards the pension fund.

The employee may choose to submit an additional voluntary contribution. Though, the total worker input may not exceed 20 percent of pay. The employee may also request the employer to limit the amount of “pay” for computations of PF to 6,500 per month. This type of planning will be done at the early stages of employment.

The balance in the PF account earns an increasing interest at government specified rates, currently at 9.50 percent per year. Employees are allowed to pull out the balance upon retirement at the age of 55.

Premature withdrawal is permissible in cases of exigencies such as:

  1. Retirement on account of permanent and total incapacity for work (suitable certification required)
  2. Migration from the country
  3. Retrenchment

Furthermore, workers are allowed refundable/non-refundable loans for certain purposes such as the purchase/construction of a house, education, marriage, or treatment for specified illness for self/family members upon meeting the specified conditions.

Tax implications on acknowledged provident funds
Employer contributions (12 percent of pay less contribution to pension of 542 pm) are not considered taxable.

Employee contributions (12 percent of pay) are entitled for a deduction of up to 1 lakh while computing the taxable income (under Section 80C).

The interest on employer contributions at rates specified is not taxable to the extent the credit does not go beyond government-specified rates. The withdrawal of the balance on retirement is not taxable if the employee has rendered continuous service of five years.

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