All employees should plan for retirement. A good way to retire comfortably is through provident funds. The government-created Employees’ Provident Fund is a retirement scheme for employees. Provident funds take part in employment welfare and pay benefits to leaving or even retiring workers and in a number of instances to dependents of deceased employees. Employers and workers both contribute to the EPF Scheme however not all provident funds are treated equally as per taxation rules. The distinction between recognised and unrecognised provident funds is a major consideration when analysing retirement cost savings.
Types of Provident Funds
There are many kinds of provident funds, with various rules and tax consequences. The major categories are the Statutory Provident Fund, Recognised Provident Fund, the Unrecognised Provident Fund along with Public Provident Fund. Let us understand about the recognised and unrecognised provident funds.
Recognised Provident Fund
A recognised provident fund conforms with the Employees’ Provident Fund and Miscellaneous Provisions Act of 1952. This fund is generally utilised by businesses with 20 or more workers. Employers may use the government-approved scheme or form their very own provident fund scheme through a trust. A fund must be approved by the Commissioner of Income Tax for recognised status.
Features of Recognised Provident Funds
The main features of recognised provident fund are as follows:
- Employer Contributions: Employer contributions are tax free as much as 12% of employee income (basic pay, dearness allowance in addition to commission on a set percentage of product sales.
- Employee Contributions: Employee contributions are deductible under Section 80C of the Income tax Act up to 1.5 lakh per year.
- Interest Earnings: Interest earned on the fund will be taxable as much as 9.5% per annum. Any interest above this rate is taxable.
- Tax-Free Withdrawals: The accumulated balance in a recognised provident fund is taxable when:
- The employee has served consistently for more than five years.
- Service is terminated for health reasons, the employer’s company closure, or even for reasons beyond the worker’s control.
- The employee passes the balance to another recognised provident fund upon job change.
Unrecognised Provident Fund (UPF)
An Unrecognised Provident Fund is the one which hasn’t been authorised by the Commissioner of Income Tax. These funds are generally established by employers and workers but don’t meet the strict rules of recognised status.
Features of Unrecognised Provident Funds
The main features of unrecognised provident fund are as follows:
- Employer Contributions: Employer made contributions aren’t exempt from tax exemptions and aren’t incorporated in the worker’s salary for tax reasons.
- Employee Contributions: Employee contributions aren’t deductable under Section 80C.
- Interest Earnings: Interest earned on the fund isn’t taxable yearly but is taxed at time of withdrawal.
- Taxation on Withdrawal: The whole accumulated balance (plus employer contributions and interest) is taxed as salary earnings at withdrawal.
Differences Among Recognised & Unrecognised Provident Funds
These are the basic differences between recognised and unrecognised provident funds for retirement savings:
1. Tax Benefits:
- Recognised Provident Fund: Provides tax advantages for employers up to 12%, tax deductions for employee contributions under Section 80C, and tax free interest up to 9.5%.
- Unrecognised Provident Fund: Does not provide employer contributions or employee contributions with tax advantages. Interest and also the balance are taxed at withdrawal.
2. Approval:
- Recognised Provident Fund: Needs approval from Commissioner of Income Tax.
- Unrecognised Provident Fund: Doesn’t require approval of the Commissioner of Income Tax.
3. Withdrawal Conditions:
- Recognised Provident Fund: Provides tax free withdrawals subject to certain conditions including continuous service of five years or transfer of balance to the next recognised provident fund.
- Unrecognised Provident Fund: The whole withdrawal amount is taxed (employer contributions along with interest along with employee contributions).
Conclusion
Most employees have a future monetary objective when retirement and knowing the various types of provident funds can impact your financial future. But with our help, you can learn about these two funds efficiently. Recognised provident funds offer hefty tax advantages and security – a popular choice for many salaried individuals. In contrast, Unrecognised Provident Funds are not tax – friendly and carry higher tax liability when withdrawn.
Employees must weigh available provident fund choices and select the one which best fits their budget and retirement plans. For businesses, a recognised provident fund can increase employee satisfaction and offer a benefit in attracting and keeping talent. Knowing the main differences between recognised and unrecognised provident funds will help people and employers make educated choices to encourage financial retirement and wellbeing.
FAQs
What is a recognised and unrecognised provident fund?
Unrecognised Provident Funds aren’t recognised by the Commissioner of Income tax as outlined in the laws of Part A of the Fourth Schedule of the Income tax Act. Any private sector institution can maintain these funds.
What is a recognised provident fund vs public provident fund?
With EPF, you don’t need to deposit the cash out of your bank account – it’s instantly deducted out of your income. The downside of EPF is that the contribution is mandatory each month. In comparison, PPF offers relief because you can contribute anytime you want.
What are the kinds of provident funds?
There are 3 kinds of Provident Funds in India – the General provident fund, Employees’ provident Fund and Public provident Fund. Each of the mentioned provident funds encourages saving when an individual has a regular income.
Can I have both an EPF and PPF account?
There is absolutely no restriction on an employee having an EPF account and also having a PPF account. Good corpus to accumulate for your retirement is extremely important now because even the children go from house to work someplace else and the parents are left to fend for themselves.
Who is liable for PF?
The employer and the worker both contribute 12% to the EPF each month. Employees can contribute up to 12% of their earnings voluntarily though the employer isn’t required to match that amount.
