Till date, PF contributions are considered to be the highest tax-free investments which also have a deduction in the year of investment.
Provident Fund (PF) is a retirement-cum-savings scheme introduced by the Central Government considering the long term/retirement needs of the population. India is designed as a welfare state. However, owing to resource constraints, schemes like PF, ESI, CGHS, etc. have been designed to make the working population contribute consistently for their needs and contingencies both during and post employment. Contributions to provident funds are made on a monthly / periodic based on the nature of these funds.
These contributions form part of the Public Account of India (NSSF) and are deployed through acquisition of Central and State Government securities. Till date, PF contributions are considered to be the highest tax-free investments which also have a deduction in the year of investment.
To give a perspective:
- There are a total of 22.18 crore EPFO accounts (Dec 18).
- Cumulative investment corpus of all three Schemes administered by EPFO stood at Rs 13.25 trillion (Mar 18, Provisional).
- Total corpus of PPF accounts stood at Rs 82,381 crores (Feb 20).
The contributions to these provident fund accounts are eligible for accretions or interest and are available for withdrawal after a minimum lock-in period. Tax exemptions and deductions are available on both the interest and contributions subject to limits specific therein. For the purposes of Income Tax, provident funds are categorized into:
a. Recognised Provident Fund (RPF) – recognized by the Commissioner of Income Tax
b. Unrecognised Provident Fund (URPF) – not recognized by the Commissioner of Income Tax
c. Statutory Provident Fund (SPF) – established under the Provident Fund Act, 1925. This is mainly for government employees, universities, educational institutions, etc.
d. Public Provident Fund (PPF) – established under Public Provident Fund Act, 1968
Tax benefits applicable to each of the above funds are as follows:
COVID Package: As part of the Economic Stimulus Package by the Ministry of Finance amid COVID-19, the following measures impacting the employees were announced:
# Workers registered with EPFO were given an option to take non-refundable advance of their own money in PF Account for any contingency expenditure. The limit for such withdrawal would be 75% of amount standing to their credit in the account or 3 months of wages. [As per April, 2020 report of the Ministry of Labor and Employment, EPFO offices across the country have settled 8,44,947 COVID-19 claims till 30.04.20 disbursing an amount of Rs.2662.41 crores to claimants]
# Further, SPF contribution of both employer and employee was reduced to 10% each from existing 12%, for all establishments covered by EPFO, for the months of June, July and August, 2020
Apart from unrecognized provident funds, all other funds are eligible for significant tax benefits, which is why provident fund contributions are one of the most popular forms of retirement savings.
Mr Mohan Prasad, a retired employee of Doordarshan, claims, “Even though we did not have our employer contributing, the fact that I personally contributed year on year to avail maximum tax benefit ensured that I retired with a handsome corpus”. India has always been a savings economy. However, the Gross Domestic Savings to GDP has been consistently falling and is currently at 30% (36% in 2007-08) which is significantly lower than China @ 44% but comparatively higher than developed economies like UK @ 16.2% and USA @ 17.9% (world bank). “Confidence comes not from always being right but from not fearing to be wrong”- provident fund contributions and investments have always been considered as the “fail-safe” for the Indian working class and continues to be the bed rock of our fragile social security system.
(By Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors LLP)