How Provident Fund (PF) is Taxed

Provident Funds or PFs are one of the most popular investment and saving vehicles in India. But before investing in PF, it is essential to understand their tax implications clearly. Apart from their operation, withdrawal, and subscription, all the different types of PFs available in India also vary with regard to their tax implication.

What Is It?

Any resident Indian can contribute to PPF. With a lock-in of 15 years, the minimum annual investment is Rs. 500, and the maximum is Rs. 1.5 lakhs.

Taxation

PPF is eligible for deductions under Section 80C of the IT Act. Even the interest and maturity returns are fully tax-exempt.

What Is It?

It is a type of PF maintained only by the government, semi-government bodies, local authorities, railways, etc. Employees and even employers can contribute to SPF accounts.

Taxation

While the SPF contributions by the employee are eligible for Section 80C deductions, any contribution by the employer is completely tax-free. The interest earned from SPF and the maturity amount is also fully tax-exempt.

What Is It?

RPF is one of the most popular EPFs (Employee Provident Funds) in India. While applicable to an employer with 20 or more employees, those with less than 20 employees can also join the scheme voluntarily.

Taxation

The RPF contribution by the employees is eligible for tax deductions under Section 80C. The contribution by the employer is tax-exempt up to 12% of the employee salary. Interest earned from RPF is tax-exempt up to 9.5%. The maturity benefits are also tax-exempt if the employee works with the employer for 5 years or more or is terminated before 5 years due to health reasons.

What Is It?

Any provident fund which is not a PPF, RPF, or SPF is considered a UPF. These PFs are not recognised by the Income Tax Commissioner. This provident fund and income tax implications are probably the most complex.

Taxation

UPFs are not eligible for tax deduction under Section 80C. However, the employer’s contribution and interest earned from UPF is not taxable. Any maturity payment on the contribution made by the employee is tax-exempt. But the interest earned from an employee’s contribution is taxed as “income from other sources.”

If you’re planning to invest in PF, it is vital to know as much about their tax implications as possible to make the right selection. If you’re unable to decide, consider the professional expertise of an investment advisor.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.