All you need to know about the types of provident funds in India and their tax implications.
Provident Funds (PFs) are a popular long-term savings option for retirement in India. They help you enhance your savings and provide a way to build wealth for your post-retirement life. Since PFs are government-backed schemes in India, you can utilise them to ensure financial security.
In addition to that, these funds come with considerable tax advantages. There are various types of provident funds, and each has distinct features and tax implications.
It is a savings and retirement benefits scheme initiated by the Government of India. It allows different types of employees or the general public to deposit funds for a fixed term and earn a predetermined interest.
Upon maturity, it provides a lump-sum amount or monthly payments, including the investment amount and the interest accrued. There are two common types of provident funds in India, namely, Public Provident Fund (PPF) and Employees’ Provident Fund (EPF).
The Employees’ Provident Fund Organisation (EPFO) administers EPF, which is applicable to workers from organised sectors. The PPF is open to the general public, whether working in the organised or unorganised sector, self-employed, or unemployed.
Various PF schemes available in India act as a crucial component of the social security net in India. There are primarily four types of provident funds:
The Provident Funds Act of 1925 mandates the establishment of this scheme. Commonly referred to as the General Provident Fund (GPF), it applies to the following entities:
Government employees
Those employed in universities and recognised educational institutions
Railway employees
The government occasionally updates the interest rates for these provident funds. Employees in the private sector are not eligible to contribute to it.
The Employees’ Provident Funds and Miscellaneous Provisions Act of 1952 applies to all establishments with 20 or more employees. They have the option to join the recognised provident fund established under the PF Act.
The employer and employees can also establish their own provident fund scheme by forming a trust. However, they need to invest funds according to the regulations in the EPF Act.
The Commissioner of Income Tax approves the trust or the scheme, after which it gets the status of a recognised provident fund.
The Commissioner of Income Tax may not approve the provident fund scheme established by the employer and employees. In this case, the scheme will be classified as an unrecognised provident fund.
Only some tax benefits are available to unrecognised provident funds as compared to the recognised funds.
The Government of India created this fund for the general public, as the name suggests. Anyone can contribute to this scheme by opening a Public Provident Fund (PPF) account with an authorised bank.
You can make contributions ranging from ₹500 to ₹1.5 Lakhs per year. You can withdraw the entire corpus of the PPF after 15 years.
By understanding the distinctions between various PF options, you can make informed decisions about your retirement savings strategy. Refer to the following table to know the key differences between them:
Parameters |
Statutory Provident Fund (SPF) |
Recognised Provident Fund (RPF) |
Unrecognised Provident Fund (URPF) |
Public Provident Fund (PPF) |
Eligibility |
Exclusively for government employees |
Applies to employees working in organisations with 20 or more employees |
Applies when the Commissioner of Income Tax rejects the provident fund scheme that the employer and employee create |
Available to all Indian citizens and Hindu Undivided Families (HUFs) |
Premature Withdrawal |
Withdrawal is allowed for specific purposes |
Withdrawal is allowed for specific purposes. |
- |
Partial withdrawals are allowed after 5 years for specific purposes |
Taxation |
Contributions are tax-deductible under Section 80C of the Income Tax Act |
Deductions are allowed under Section 80C of the Income Tax Act |
Deductions are not allowed under Section 80C of the Income Tax Act |
Contributions are tax-deductible under Section 80C of the Income Tax Act |
The tax rules applicable to PF contributions, withdrawals, and earnings differ based on the specific account type. Here are the tax implications associated with the different types of provident funds discussed above:
Employee’s Contribution to the Fund: Deductions are permitted under Section 80C of the Income Tax Act of 1961
Employer’s Contribution to the Fund: Contributions made by the employer are exempt from tax
Interest Income: The interest income earned is exempt from tax; refer to the amendment for details
Upon Retirement: The lump sum amount received upon retirement is exempt from tax, subject to certain conditions as outlined in the amendment
Employee’s Contribution to the Fund: Deductions are allowed under Section 80C of the Income Tax Act of 1961
Employer’s Contribution to the Fund: The employer’s contribution is exempt up to 12% of basic salary plus dearness allowance
Interest Income: Interest income is exempt up to 9.5% per annum
Upon Retirement: The lump sum amount received by an employee is exempt if retirement occurs for any of the following reasons:
1. Due to ill health
2. Due to the transfer of the balance to a new employer
3. Due to the shutdown of the employer’s business
4. After 5 years of service
If you, as an employee, retire before completing 5 years of service for any reason not mentioned above, you will have to pay tax. It will apply on the lump sum amount you receive. The exemption on the employer’s contribution and interest income will also be withdrawn.
Employee's Contribution to the Fund: Deductions are not allowed under Section 80C of the Income Tax Act of 1961
Employer’s Contribution to the Fund: The employer’s contribution is not taxed when the initial contribution is made
Interest Income: Interest income is not taxed on a yearly accrual basis
Upon Retirement:
1. Employee Contribution: The amount received is not taxable
2. Interest on Employee’s Contribution: This interest is taxable under the head ‘Income from Other Sources'
3. Employer’s Contribution: The amount received is taxable under the head ‘Salary’
4. Interest on Employer’s Contribution: This interest is also taxable under the head ‘Salary'
Contribution: Deduction is allowed under Section 80C of the Income Tax Act of 1961
Interest Income: Interest income is exempt from tax
Beyond the tax advantages, PF provides a secure and systematic way to build a substantial retirement corpus. By making contributions to provident funds, you can enjoy the following benefits:
PFs are an essential savings tool for retirement, providing a financial safety net when you retire. You can receive the accumulated amount as a lump sum at that time.
Contributions to these funds typically qualify for tax deductions under Section 80C of the Income Tax Act of 1961.
Yes, you can invest in more than one type of provident fund. It can be beneficial for maximising retirement savings and tax efficiency.
The taxation rules for provident funds at retirement depend on the type of provident fund account you have.
Whether you need to pay tax on withdrawing your provident fund account or not depends on the type of account. Check the provident fund withdrawal rules associated with the specific type of account you have.