Define provident fund and explain various kinds and their working system

Provident Fund :-

This fund is maintained by a govt. and private organizations for the benefit of the employees. This fund is consists upon the following :

I)       Contribution of the employee

II)     Contribution of the employer

III)  The interest credited

Every month a particular amount is deducted from the employees salary. Generally employer also contributes the same amount in this fund.

Provident fund is invested in profitable business. So the amount of interest is credited in this fund. At the time of retirement the whole amount paid to the employee.

KINDS :

1.      Govt. Provident Funds :-

It is maintained by Govt. and sami govt. organizations :

Example : I) Federal Govt. ii) Provincial Govt.

a) Employees contribution to this fund is chargeable to tax.

b) Employer contribution is not included in salary and not chargeable to tax.

c)      Interest on provident fund is not included in salary and not chargeable to tax. 

d)      The amount paid to the employee at the time of retirement is not taxable. 

2.      Recognized Provident Funds :-

This fund is maintained by a private organizations after completing the conditions prescribed by law.

For the recognition of this fund application is submitted to the income tax commissioner. If the grants recognition to such funds then it is called recognized provident fund. This fund is beneficial for the both the employer and employees.

Treatment :-

I)       Employers contribution is not included in the salary and it is taxable.

II)     Employees contribution is included in the salary and it is taxable.

III)  Interest credited to this fund is not included in salary and the rate of interest is exempt up to 16% or 1/3 of the salary.

IV)  The amount of fund received by the employee is tax free.

3.      Unrecognized Provident Fund :-

If the private organization maintains such fund without the recognition of the income tax commissioner, it is called unrecognized provident fund.

Treatment :-

I)       Employees contribution is included in the salary and not taxable.

II)     Employers contribution is not included in the salary and also not taxable.

III)   Interest credited is also not taxable.

At the3 time of retirement such amount received is taxable to the extent of employers contribution is taxable and interest there on.