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Provident funds Taxability including withdrawal of balance of provident fund

Provident funds Taxability including withdrawal of balance of provident fund

Provident funds taxability including withdrawal of balance of provident fund from employees provident fund scheme- tax implications

TDS on Employees provident fund -Section 192A inserted with effect from 01.06.2015

Is it possible to avoid TDS (tax deduction at source) by submitting form no.15G/15H u/s 197A in respect of pre mature withdrawal?

Provident funds are of four types:

  1. Recognized provident fund(RPF)—-for private sector salaried employees for getting tax benefits
  2. Unrecognized provident fund(URPF)—–for private sector salaried employees for getting partial tax benefits
  3. Statutory provident fund(SPF)—-for government employees for getting tax benefits
  4. 15 years Public Provident Fund (PPF) —for any individual for getting tax benefits by saving in it.

Even salaried employees can in addition to RPF, URPF, SPF can open the PPF account for claiming the full exemption u/s 80C of Rs.1, 50,000/-.

Recognised provident fund:

In present scenario what happened is employees become member of the recognized provident fund (RPF) in either of two ways:

  • By becoming member to the provident fund owned and managed by employer through trusts and getting the fund recognized by the by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part A of the Fourth Schedule  of Income Tax act, 1961,or
  • By becoming member to the provident fund under a scheme framed under the Employees’ Provident Funds Act, 1952 (19 of 1952) in which employer establishment get a code for depositing the PF amount to the EPFO. In this employer does not create trust for managing the provident fund of employees

Now, Contribution by employee to recognized provident fund  from his salary, equal contribution by employer and interest earned on accumulated balances are treated in income tax in following ways:

  1. Employee contribution from salary to recognized provident fund (RPF) is eligible for deduction u/s 80C.
  2. Employer contribution equal to 12% of salary is not deemed to be income and hence not taxable. Employer contribution more than 12% is taxable for employees under the head “Salaries”
  3. Interest earned on accumulated balances on recognized provident fund is not deemed to be income if interest earned is at a rate not exceeding such rate as may be fixed by Central Government which presently is 9.5% and hence not taxable. Interest earned above the rate fixed by Central Government is taxable for employees under the head “Salaries”.
  4. In case of premature withdrawal as explained later on, accumulated balance of employee contribution is exempt from tax, interest on employees contribution is taxable under the head “Income from other sources” and accumulated balance of employer contribution including interest on employer contribution is taxable under the head “Income from Salaries”. Otherwise lump sum payment received at the time of retirement or termination of service is exempt from tax.

Now, in case of lump sum accumulated balance received at the time of retirement or termination of service, such amount is exempt from tax under section 10(12) if following conditions as prescribed under rule 8 of fourth schedule are satisfied, otherwise it will be taxable as “taxable premature withdrawal” under the head “Salaries” and “other sources” considering the fund as unrecognized provident fund and will be subject to TDS:

  • If, he has rendered continuous service with his employer for a period of five years or more, or
  • if, though he has not rendered such continuous service, the service has been terminated by reason of the employee’s ill-health, or by the contraction or discontinuance of the employer’s business or other cause beyond the control of the employee, or
  • if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer.

Explanation to rule 8.—Where the accumulated balance due and becoming payable to an employee participating in a recognised provident fund maintained by his employer includes any amount transferred from his individual account in any other recognised provident fund or funds maintained by his former employer or employers, then, in computing the period of continuous service for the purposes of clause (i) or clause (ii) the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall be included.

TDS on recognised provident fund:

  1. TDS to be deducted by EPFO u/s 192A. It has been inserted with effect from 01.06.2015 for deduction of TDS on accumulated balances withdrawal by employees who have not fulfilled the above conditions. It runs as under:

             “ Notwithstanding anything contained in this Act, the trustees of the Employees’ Provident Fund Scheme, 1952, framed under section 5 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952) or any person authorised under the scheme to make payment of accumulated balance due to employees, shall, in a case where the accumulated balance due to an employee participating in a recognised provident fund is includible in his total income owing to the provisions of rule 8 of Part A of the Fourth Schedule not being applicable, at the time of payment of the accumulated balance due to the employee, deduct income-tax thereon at the rate of ten per cent(10% no cess and surcharge applicable) :

Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payment to the payee is less than thirty thousand rupees:

Provided further that any person entitled to receive any amount on which tax is deductible under this section shall furnish his Permanent Account Number to the person responsible for

deducting such tax, failing which tax shall be deducted at the maximum marginal rate. i.e. 34.608% for F.Y.2015-2016 (A.Y.2016-2017).

Please note in case tax payable on the total income of the employees is Nil even after including the “taxable premature withdrawal” as explained above , a self declaration in the form of 15G / 15H for non-deduction of tax can be submitted for no deduction of tax.

  1. TDS to be deducted by trusts managing the fund on behalf of employer shall be as per the rule 9 of  fourth schedule of Income tax act,1961 which is reproduced below:

“Rule 9:

(1) Where the accumulated balance due to an employee participating in a recognised provident fund is included in his total income owing to the provisions of rule 8 not being applicable, the Assessing Officer shall calculate the total of the various sums of tax which would have been payable by the employee in respect of his total income for each of the years concerned if the fund had not been a recognised provident fund, and the amount by which such total exceeds the total of all sums paid by or on behalf of such employee by way of tax for such years shall be payable by the employee in addition to any other tax for which he may be liable for the previous year in which the accumulated balance due to him becomes payable.

(2) Where the accumulated balance due to an employee participating in a recognised provident fund which is not included in his total income under the provisions of rule 8 becomes payable, an amount equal to the aggregate of the amounts of super-tax on annual accretions that would have been payable under section 58E of the Indian Income-tax Act, 1922 (11 of 1922), for any assessment year up to and including the assessment year 1932-33, if the Indian Income-tax (Second Amendment) Act, 1933 (18 of 1933), had come into force on the 15th day of March, 1930, shall be payable by the employee in addition to any other tax payable by him for the previous year in which such balance becomes payable.”

In our opinion, in such cases rate of 10% & 34.608% as specified in section 192A are not applicable. Further benefit of non deduction of tax by submission of Form 15G / 15H is not applicable.

Un-Recognised provident fund (URPF):

Employees who are the members of unrecognized provident fund get the following partial tax benefits:

  1. Employee contribution from salary to unrecognized provident fund (URPF) is not eligible for deduction u/s 80C.
  2. Employer contribution is exempt from tax. No concept of 12% as in RPF.
  3. Interest earned on accumulated balances on unrecognized provident fund is exempt from tax. No concept of rate as in RPF.
  4. Lump sum payment received at the time of retirement or termination of service of accumulated balance of employee contribution is exempt from tax, interest on employee’s contribution is taxable under the head “Income from other sources” and accumulated balance of employer contribution including interest on employer contribution is taxable under the head “Income from Salaries”. There is no condition or concept of “Taxable premature withdrawal”.

No need to deduct TDS for accumulated balance of fund payment as in the case of recognised provident fund and as such no requirement for furnishing of 15G / 15H.

Statutory provident fund (SPF):

Employees who are the members of statutory provident fund get the following tax benefits:

  1. Employee contribution from salary to statutory provident fund (SPF) is eligible for deduction u/s 80C.
  2. Employer contribution is exempt from tax. No concept of 12% as in RPF.
  3. Interest earned on accumulated balances on unrecognized provident fund is exempt from tax. No concept of rate as in RPF.
  4. Lump sum payment received at the time of retirement or termination of service is exempt from tax. There is no condition or concept of “Taxable premature withdrawal”.

No need to deduct TDS for accumulated balance of fund payment as in the case of recognised provident fund and as such no requirement for furnishing of 15G / 15H.

Public provident fund (PPF)

An employee in addition to other fund as explained above can contribute to 15 years PPF account and get the following tax benefits:

  1. Contribution eligible for deduction u/s 80C.
  2. Interest on balances is exempt under section 10.
  3. There is no concept of employer contribution as it is self contributing fund.
  4. Maximum contribution that can be paid is Rs.1, 50, 000/-.
  5. TDS, 15H or 15G not applicable.

Benefit of deduction u/s 80C is available in respect of amount deposited under PPF by an individual in his own account or in the account of his/her spouse or in the account of any child.

Also see :

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