Indian Income Tax Issues

Ø Employer contribution is not treated as income and hence, not taxable as income in the hands of the employee.

Ø For the contribution made by employee, deduction under section 80C is available.

Ø Interest earned on the balance in the fund account is not treated as income and hence not taxable in the hands of the employee.

Ø Payment received at the time of retirement or termination of service is exempt from tax (Section 10(11).

Ø Employer contribution is not taxable up to 12% of salary. If employer contribution exceeds 12% of salary, the excess over 12% of salary is taxable.

Ø Interest earned on the balance in the fund account is exempt up to the notified rate (9.5%). Where the interest is earned over and above the notified rate of 9.5%, the excess is taxable.

Ø Payment received at the time of retirement or termination of service is exempt subject to certain conditions

Note: Payment received at the time of retirement or termination is exempt if:

a. The employee has rendered continuous service with his employer for a period of 5 years or more. (In case there is accumulated balance with previous employer/s and the employee carries forward this balance to new employer, the period/s for which employee rendered service to former employer/s is to be included in computing the period of continuous service with present employer).

b. In case 5 years continuous service is not there, 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 cases beyond the control of the employer

c. On termination of the employment, the employee obtains employment with other employer and carries forward the balance in provident fund account.

d. If the entire balance standing to the credit of the employee is transferred to his account under a pension scheme referred to in Section 80CCD and notified by the Central Government (being National Pension Scheme and Atal Pension Yojana)

Ø For the contribution made by employee, no deduction is available under section 80C.

Ø Interest earned on the balance in the fund account is not treated as income in the hands of the employee.

Ø In case of payment received at the time of retirement or termination of service, the amount attributable to own contribution is not taxable. Amount attributable to interest earned is taxable as other sources of income. Amount attributable to employer contribution is taxable as salary income. However, relief under section 89 is available.

Ø Employer contribution is exempt. It is taxed as perquisite where amount contributed by Employer exceeds Rs.1,50,000.

Ø In case of contribution made by employee, deduction under section 80C is available.

Ø Sum received at the time of retirement or termination is exempt under section 10(13) if the same is paid on the death of a beneficiary, or paid to employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement, or payment by way of refund of contributions on the death of a beneficiary.

In case the sums are received otherwise than under the above circumstances, the payment received is taxable in the hands of the employee (whether attributable to contribution by employee/employer or interest)

Ø There is no question of employer contribution in public provident fund. For the contribution made by the assessee, deduction under section 80C is available.

Ø Payment received at the time of closing of account is exempt as per section 10(11).