INCOME TAX

PROVIDENT FUND

To encourage savings for the social security of employees ,the government has setup various kinds of provident funds. The employee contributes a fixed percent Of his salary towards these funds and in many cases employer also contributes. The whole contribution along with interest is credited to employees account. He will get payment out of this fund at the time of retirement and at some Important occasions. If the employee dies, his hiers will get the full payment.

Provident funds

1. Saving on Provident Fund(PF) earns 8.5% interest rates on monthly cumulative basis. 2. It is compulsory that 12% of basic salary will be deducted as the PF.

FEATURES OF PROVIDENT FUND

3. With your interest, you can increase PF contribution up to 25%of basic salary. 4. Interest income on PF is not taxable.

5.If you are with drawing the money before five years, the amount is taxable. 6.You can close the PF account only when you retire or leaving the company. 7.The main advantage of PF is it adds lump sum amount for your retirement apart from any other savings.
8. Up to Rs.100000 can be shown as the tax exemption.

9. PF is compulsory if you work for a company having 20 or more employees10. 10.Each month, a certain percentage of your salary is invested in it. This percentage varies from company to company and is usually between 8% and 12%.

11.PF is a compulsory investment for all salaried people.

. Provident funds are of 4 types

1. statutory provident fund or the fund to which the act of1925applies (SPF)

2. recognizsed provident fund (RPF)

3. unrecognised provident fund (URPF) 4. public provident fund (PPF)

1.Statutory provident fund

Statutory provident fund is the oldest type of fund. It was started in the year 1925 through a Provident Fund Act of 1925 this fund was started with a view of promoting savings amongst government employees. Generally, this fund is maintained by government or semi government departments like local authorities, railways, universities and recognized educational institutions, insurance companies, Reserve Bank of India ,etc..

2.Recognised provident fund

As the name suggests, it is a fund to which the commissioner of income- tax has given the recognition as required under the income tax Act. Generally this fund is maintained by industrial undertakings, business houses, banks etc.. The employers contribution over and above 12% of employees salary, will be included in employees salary income for tax purposes. The employees contribution towards this fund will fully qualify for deductions u/s 80c

3.Unrecoginsed provident fund

Unrecogenised provident fund refer to all those provident funds which are not recognized by commissioner of income tax. (their are not recognised by the commissioner of income tax ,as they have not satisfied the conditions lay down in the income tax act for their recognition) These provident funds may be found anywhere. But , usually they are maintain by private industrial and commercial undertakings.

4.Public provident fund

Public provident fund was established as for the provision act the finance act of 1968. It came into force with effect from 1st July 1968.It is mainly intended for the benefit of self employeed persons, such as lawyers, doctors, chartered accountants, management consultants, etc.. Though this provident mainly intended for the benefit of the self employeed persons, It is open to any member of the public irrespective of the occupations practice by him.

Interest Rate for PF

The rate of interest that you earn on your PF investment is fixed by the Central Government every year in March / April. The rate of interest changes every year, but due to the nature of politics in India, it is usually higher than the prevailing market rates. The current rate of interest on PF is 8.5%.

PF, Income Tax and the double benefits

Your contribution towards PF is considered as a part of investments undertion 80C of the Income Tax (IT) Act. Thus, this amount gets deducted from your salary, and you do not pay any tax on it! And that is the best part of it is that its not just you making the investment: the company makes an equal investment for your retirement! Isn't that great? Its free money, after all! Well not totally free for those of you working for private companies, the companies contribution to PF would be part of the cost to company.

Benefits of Provident Fund (PF)

Long Term Investment: A PF account is opened for an initial period of 15 years. That is, you make a commitment of 15 years upfront ,this means that you can reap the benefits of compounding . Absolute Safety: PF is a Government scheme it is backed by the Government of India. Thus, it is among the safest instruments you can invest in India. This guarantees the safety of your principal and the interest earned on it. Again,

Multiple Income Tax Benefits: This is a very big sweetener for PF PF provides not one, but two tax benefits! One, the investment made in PF is deductible from your income under Section 80C of the Income Tax Act. And two, the interest earned in a PF account is tax free! Regular Investments: This is a side effect of the way PF operates. Since PF is not a onetime lump-sum investment, you have to invest in it every year, year after year, at least for 15 years. This brings in discipline, which many of us lack when it comes to investments!

. Great Interest Rate: The interest rate for PF is not fixed. It can be changed every year by the government. It should be noted that the government doesnt change the interest rate on PF drastically since it is held by a very large number of people. Therefore, this interest rate is quite stable.

Nomination Facility Available: You can specify a nominee for your PF account. The nominee would get the trusteeship of this account in case your death occurs before the closure of the PF account.

.Facility of Withdrawals: PF is meant for long term investments. But there might be times when you need funds for some emergency. To take care of such situations, PF does allow One withdrawal, once a year, from 7th year onwards. .Facility of Loan: In case of emergency situations before the 7th year, you can take loans from your PF account. You can take loans between 3rd and 6th year of opening the PF account. The maximum loan amount available will be equal to 25% of the balance at the end of the 2nd immediately preceding year.

.Low Minimum Investment: The minimum investment in PF is Rs. 500 per year. This low amount ensures that even people falling in low income groups can save for their retirement using a government backed, safe investment avenue. .Extension Possible: If you do not need the funds at the time of maturity (after 15 years), or can not find a better investment avenue for these funds, you can opt to continue the PF account. You can extend the PF account for 5 years at a time, and you can have as many extensions as you want.

Other things you should know about Employees Provident Fund / EPF / PF

The PF balance can be transferred when you change jobs. You can define a nominee for your PF account. You get an annual statement of your PF balance.