Provident Fund: Types, Applicability, Eligibility and FAQs

What is a Provident Fund?

A Provident Fund is a savings and investment initiative established voluntarily by both employers and employees to serve as a long-term financial reserve, primarily intended to support an employee’s retirement. The Employees Provident Fund Act, 1952 aims to provide a kind of social security to the industrial workers. The act mainly focuses on providing retirement or age-old benefits such as Provident Funds, Superannuation Pensions, Family Pensions, and Deposit-linked Insurance.

Geeky Takeaways:

• The Act mandates both employees and employers to contribute a certain percentage of the employee’s basic wages and dearness allowance to the Employees’ Provident Fund (EPF).
• The current contribution rate is set by the government and is subject to periodic revisions.
• Employees covered under the Act have individual Provident Fund (PF) accounts where their contributions, as well as the employer’s contributions, are deposited.

Types of Provident Fund

1. Statutory Provident Fund (SPF): It is commonly referred to as a government provident fund, it is specifically designed for employees in government, semi-government, universities, educational institutions affiliated with a university established under statute, or other specified institutions.

2. Public Provident Fund (PPF): This type of provident fund is available to the general public. In simple terms, it means one can invest in PPF if you are salaried, self-employed, or even unemployed for a while (as long as funds are available to invest).

3. Recognized Provident Fund (RPF): As per the act, any person employing 20 or more individuals is obligated to register under this scheme. Registration is optional for establishments with less than 20 employees.

4. Unrecognized Provident Fund (URPF): An Unrecognized Provident Fund (URPF) is initiated by both employers and employees in an establishment, subject to approval by the Commissioner of Income Tax. In the case of RPF, if the Commissioner of Income Tax refuses to approve the provident fund scheme, it becomes an unrecognized fund.

Employee Provident Funds, 1952

The Employee Provident Funds, 1952 represents a beneficial legislation designed to enhance the future prospects of industrial workers. This law serves the following purposes:

• Retirement Benefits: It ensures financial support for employees upon their retirement.
• Survivor Benefits: In the unfortunate event of an employee’s death during employment, the legislation provides financial benefits to their dependents.

Enacted as a social security measure, the Employee Provident Funds Act focuses on offering non-withdrawable financial benefits. The payable sum is typically disbursed upon an employee’s retirement or in the event of their demise. The administration of this scheme is entrusted to various entities:

• Central Board (Section 5A): Responsible for overseeing and managing the provident fund scheme at the central level.
• Executive Committee (Section 5AA): Formed to execute and implement the provisions of the act.
• State Board (Section 5B): Manages the provident fund scheme at the state level.
• Regional Committee: Works at the regional level to ensure the effective functioning of the provident fund scheme.

A Chief Executive Committee, appointed and constituted by the central government, plays a crucial role in coordinating and overseeing the administration of this legislative framework. In essence, the Employee Provident Funds Act is a comprehensive social security initiative aimed at securing the financial well-being of industrial workers, both during their employment and in their post-employment phase.

Applicability of Provident Fund

1. Factories in Designated Industries: This includes any factory involved in industries specified in Schedule 1, provided it employs 20 or more individuals.

2. Other Establishments with 20 or more Employees: Any establishment, apart from factories, that employs 20 or more individuals, or a specific class of such establishments as notified by the Central Government.

3. Special Notification for Smaller Establishments: The Central Government can notify any other establishment, even if it employs less than 20 persons, thereby extending the applicability of the Act.

Eligibility Criteria for EPF

Any individual employed for the work of the establishment, whether directly or through a contractor, is eligible for the benefits provided by the Act. This eligibility is based on the connection of the work with the establishment.

Taxability and Withdrawal Rules of Provident Fund

Understanding the tax implications and withdrawal options related to Provident Fund (PF) is essential for employees. The deduction of PF can be claimed under Section 80C when computing Income Tax. Importantly, when an employee withdraws the PF amount along with the accrued interest after retirement, neither the PF amount nor the interest is subject to taxation.

Additionally, employees have flexibility regarding the withdrawal of PF in certain circumstances. If an employee faces unemployment for more than two months, they have the option to accumulate and withdraw their PF.

Specific withdrawal rules include the following:

• 75% Withdrawal after 1 Month of Unemployment: Employees can withdraw 75% of their PF amount after being unemployed for a month.
• Remaining 25% Withdrawal after 2 Months of Unemployment: The remaining 25% of the PF amount can be withdrawn after two months of unemployment.
• Employee’s Choice after 75% Withdrawal: Following the withdrawal of 75%, employees have the choice to either continue with the PF account or withdraw the entire remaining amount.

Understanding these rules ensures that employees can make informed decisions regarding their PF, taking into account both taxation benefits and withdrawal options based on their employment status.

Income Tax Liability on PF Withdrawal

Scenario	Taxability
Amount withdrawn is < ₹50,000 before completion of 5 continuous years of service.	No Tax Deducted at Source (TDS) is applicable; however, the amount of Provident Fund (PF) should be disclosed while filling the return.
Amount withdrawn is > ₹50,000 before completion of 5 years of continuous service.	TDS is applicable at a rate of 10% when PAN is furnished. However, no TDS is deducted if Form 15G or 15H is furnished.
Withdrawal of EPF after 5 years of continuous service	No mention is required in the return as the amount is not taxable, and consequently, no Tax Deducted at Source (TDS) is applicable.
Transfer of PF from one account to another upon a change of job.	No inclusion in the return is necessary, given that the amount in question is not deemed taxable. Consequently, there is no applicability of Tax Deducted at Source (TDS).
Before completion of 5 continuous years of service, if employment is terminated due to employee’s ill health, the business of the employer is discontinued or the reasons for withdrawal are beyond the employee’s control.	It is unnecessary to include the aforementioned amount in the return, as it is not deemed taxable. Consequently, there is no applicability of Tax Deducted at Source (TDS).

Universal Account Number (UAN)

Universal Account Number (UAN) is a number that is given to an employee by the Ministry of Employment and Labour under the Government of India, who maintains provident fund accounts. UAN is used to track information done by his employer regarding his provident fund. Earlier, when an employee joins a new organization, it used to assign a new PF account; however, after the UAN came into existence, the process became smooth. Hence through UAN, difficulties faced by the employee when he/she joins a new organization can be solved and their activities can be tracked if there are any payment-related issues.

Uses of UAN

• A unique number independent of employers.
• Links all PF accounts when an employee switches companies.
• Authentication by employers for employees.
• Verification of EPF passbook and monthly updates through SMS.

Conclusion

Understanding the intricacies of Provident Funds (PF) is paramount for both employers and employees in navigating long-term financial planning and retirement benefits. From the diverse types of PFs, such as the Statutory Provident Fund (SPF), Public Provident Fund (PPF), and Recognized Provident Fund (RPF) to the tax implications and withdrawal rules, individuals can make informed decisions tailored to their financial needs.

The legal framework governing these funds, particularly the Employee Provident Funds Act of 1952, stands as a pillar for securing the future of industrial workers, offering retirement and survivor benefits. The Act’s applicability, eligibility criteria, and exemptions are outlined, ensuring a broad spectrum of benefits for the employees.

Employee Provident Funds, 1952- FAQs

What is the purpose of the Employee Provident Funds Act of 1952?

The Act serves the dual purpose of providing retirement benefits and survivor benefits to industrial workers, ensuring financial security during and post-employment.

How does taxation work for Provident Fund withdrawals?

PF withdrawals are tax-free if the amount is withdrawn after five years of continuous service. TDS may apply in certain cases, but there are provisions for exemptions.

What are the different types of Provident Funds, and who can participate in them?

Provident Funds include SPF, PPF, RPF, and URPF. Eligibility varies, with SPF for government employees, PPF for the public, RPF for establishments with 20 or more employees, and URPF for smaller establishments with optional membership.

What is the eligibility criteria for employees to join Provident Funds?

Employees earning up to ₹6,500 per month are eligible, provided they have completed three months of continuous service or 60 days of actual work.

How does the Universal Account Number (UAN) simplify Provident Fund management?

UAN is a unique number assigned to employees, independent of employers, facilitating the linking of all PF accounts when switching companies and enabling online verification and updates.

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.