A severance payment is a type of guaranteed fund in which the employee pays part of the income and the employer pays on the employee’s behalf. Exemptions for amounts transferred to the Provident Fund are regulated by §§ 10 Para. 12 ESTG.

The Provident Fund requires both employer and employee to contribute 12% of her PF income. The employee-provided fund receives 8.33% of the employer’s contributions, and the employee-provided fund receives the remaining 3.67%. The employer’s payment to the employee deposit insurance scheme is 0.50% and the administrative fee is also 0.50%.

4 Types of Provident Funds

1. Recognized Provident Fund

All establishments with 20 or more employees are subject to the Provident Fund Act of 1952. The establishments covered by the scheme have the option of applying for the government-approved scheme or founding their own Provident Fund trust. The establishments can join the PF (Provident Fund) Act 1952, which is a recognized provident fund, which is a government-approved system. Alternatively, the employer and employee of the organization may form a trust to establish a provident fund scheme, with funds invested by the Provident Fund (PF) Act of 1952. Before it can be labeled as a recognized provident fund, the scheme must be approved by the commissioner of income tax.

2. PPF (Public Provident Fund)

For the general population, the government has established a provident fund. By creating a public provident fund account with an authorized bank, anyone can contribute to this scheme. Amounts ranging from INR 500 to INR 1,50,000 can be deposited. Following the completion of 15 years, the PPF (Public Provident Fund) corpus can be entirely withdrawn.

3. Statutory Provident Fund

The Provident Funds Act of 1925 established this plan. It is intended for government employees, accredited educational institutions, railways, universities, and other similar organizations. The General Provident Fund is another name for Statutory Provident Fund. The government adjusts the interest rates on General Provident Funds regularly. Employees in the private sector are not covered by the General Provident Fund (GPF).

4. Unrecognized Provident Fund

If the commissioner of income tax does not approve the provident fund program established by the employer and employee (as described in Recognized Provident Fund), the scheme is considered unrecognized.

Tax Treatment of Provident Fund

1. Tax on Recognized Provident Fund

When an employer’s contribution to a provident fund reaches 12 percent, it is taxed. The employee’s contribution to the provident fund is taxed.

Tax will be deducted if the rate of interest credited to the provident fund is greater than 9.5 percent. The retirement payment is tax-free if the following conditions are met:

• If the employer-provided 5 years or more of continuous service.
• If the employee was fired for a variety of reasons, including health concerns, the employer’s decision to stop doing business, and so forth.
• If an employee resigns and then returns to work for another company.
• If the employee’s complete credit balance is transferred to his or her account under a pension system under section 80CCD.

2. Tax on PPF (Public Provident Fund)

The contribution of an employer to a provident fund is taxed. The interest and retirement payments credited to the provident fund are tax-free.

3. Tax on Statutory Provident Fund

The employer’s contribution to the provident fund is tax-free, while the employee’s contribution is taxed. Tax-free interest and retirement payments are credited to the provident fund.

4. Tax on Unrecognised Provident Fund

Employer contributions to a provident fund are tax-deductible. Under the following circumstances, the retirement payment is taxable:

• Under the heading Salaries, payments received in respect of the employer’s contribution and interest are taxed.
• Payments received in exchange for interest on an employee’s contribution are taxable as income from other sources.
• Payments received in exchange for an employee’s contribution are not taxed.

Summary Table for PF Exemption

The government has established numerous types of provident funds to encourage employees to save for their social security. In many circumstances, the employer also contributes a specified proportion of the employee’s salary to these accounts. The full amount of the donation, plus interest, is credited to the employee’s account. He will be paid from this money when he retires, as well as on other significant events. The employee’s heirs will receive the entire sum if he dies.