PROVIDENT FUND

Provident fund

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the
time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The employer also generally contributes the
same amount out of his pocket, to the fund. The contribution of the employer and the employee
are invested in approved securities. Interest earned thereon is also credited to the account of
the employee. Thus, the credit balance in a provident fund account of an employee consists of
the following:

(i) employee’s contribution

(ii) interest on employee’s contribution

(iii) employer’s contribution

(iv) interest on employer’s contribution.

The accumulated balance is paid to the employee at the time of his retirement or resignation.
In the case of death of the employee, the same is paid to his legal heirs.

The provident fund represents an important source of small savings available to the
Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a
provident fund account.

(1) Recognised Provident Fund (RPF)
Recognised provident fund means a provident fund recognised by the Commissioner of
Income-tax for the purposes of income-tax. It is governed by Part A of Schedule IV to the Income-tax Act, 1961. This schedule contains various rules regarding the following:

(a) Recognition of the fund

(b) Employee’s and employer’s contribution to the fund

(c) Treatment of accumulated balance etc.

A fund constituted under the Employees’ Provident Fund and Miscellaneous Provisions Act,
1952 will also be a Recognised Provident Fund.

(2) Unrecognised Provident Fund (URPF)

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.Statutory Provident Fund (SPF)

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government,
railways, semi-government institutions, local bodies, universities and all recognised
educational institutions.

(4) Public Provident Fund (PPF)

Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of
the fund is open to every individual though it is ideally suited to self-employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer. An
individual may contribute to the fund on his own behalf as also on behalf of a minor of whom
he is the guardian.

For getting a deduction under section 80C, a member is required to contribute to the PPF a
minimum of ` 500 in a year. The maximum amount that may qualify for deduction on this
account is ` 1,50,000 as per PPF rules.

A member of PPF may deposit his contribution in as many installments in multiples of ` 500 as
is convenient to him. The amount of contribution may be paid at any of the offices or branch
offices of the State Bank of India or its subsidiaries and specified branches of banks or any
Post Office.