DEFINITION of 'Provident Fund'A compulsory, government-managed retirement savings scheme used in India,Hong Kong, Singapore, Malaysia, Mexico and other countries that is similar to the United StatesSocial Securityprogram. It is run by a government for the benefit of its citizens. A providentfundis a form of social safety net into which workers must contribute a portion of their salaries and employers must contribute on behalf of their workers. The money in the fund is then paid out to retirees, or in some cases to the disabled who cannot work.BREAKING DOWN 'Provident Fund'Provident fund specifics vary widely by country, but in general their purpose is to provide financial support for those who meet the plans defined retirement age. Governments set the age limit at which withdrawals are allowed to begin (penalty-free), though some pre-retirement withdrawals may be allowed under special circumstances, such as for medical emergencies. In Swaziland, for example, provident fund benefits can be claimed as early as age 45. Each provident fund sets its own minimum contribution level for workers and employers, which may vary depending on the workers age. Some funds allow individuals to contribute extra to their benefit accounts and allow employers to contribute extra for their employees.If a worker dies before receiving benefits, his or her surviving spouse and children may be able to receive survivors' benefits from the provident fund. Some countries also allow individuals to receive an earlypayoutif they emigrate to another country. Those who work past the minimum retirement age may face restricted withdrawals until full retirement.Unlike U.S. Social Security, some countries provident fund accounts are held in individual members names. Instead of younger workers paying into a communal account, individuals get back the money they contributed to their own accounts plus interest or investment returns. In this regard, a provident fund resembles the U.S. concept of a 401(k), except that the money in provident funds is held by the government, not by a privatefinancial institution. Also, the government, or a provident fund board - not the workers - largely or entirely chooses how provident fund contributions are invested. Some countries, such as Singapore, guarantee workers a minimum return on their provident fund contributions.While the use of private savings accounts have grown in popularity, publicly administeredretirement accountsremain important in both developing and developed economies. Societies in the developing world, for example, are still catching up with the rapid rise inindustrialization, movement of citizens to urban areas from rural ones and changing family structures. In traditional Asian societies, for example, the elderly were provided for by their extended families. Declining birth rates, widely dispersed families and longer life expectancies have made maintaining this extended safety net difficult, and governments have stepped in to providelong termfinancial planning.Provident funds are differentthan sovereign wealth funds, which are funded through royalties obtainedfrom the development of natural resources.IS IT COMPULSORY FOR ALL EMPLOYEES TO CONTRIBUTE TO THE PROVIDENT FUND?

Employeesdrawingbasic salaryupto Rs. 1,5000/- have to compulsory contribute to the provident fund . however , employees drawing above Rs. 15,000/- say Rs. 15,001 have an option to become member of theprovident fund.ADVANTAGES:1. Tax benefit u/s 80C2. retirement benefit3. withdrawal benefit

Different Types of Provident Fund and Tax Benefit Related to Investment in ProvidentFundThere are different types of provident fund (PF) which are used by individual for investment and saving purpose and each is having different tax treatment.But Broadly Provident fund can be categories into four categories1. Statutory Provident Fund(SPF)2. Recognized Provident Fund (RPF)3. Unrecognized Provident Fund(URPF)4. Public provident fund(PPF)Statutory Provident Fund (SPF / GPF) These are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc., The contributions made by the employer are exempted from income taxes in the year in which contributions are made. The contributions made by the employee can be claimed as tax deductionsunder section 80c. Interest amount credited during the financial year is not treated as income and hence it is exempted from income tax. The redemption amount at the time of retirement is exempted from tax. If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.Recognized Provident Fund (RPF) Any establishment (business entity) whichemploys 20 or moreemployees can join RPF. Most of the individuals(who are salaried)generally contribute to this type of Provident Fund. This is one of the popular types ofEmployees Provident Funds(EPF).(Organizations which employ less than 20 employees can also join RPF if the employer and employees want to do so) The business entity can either join the Govt. scheme set up by the PF Commissioner (or) the employer himself can manage the scheme by creating a PF Trust. All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax(CIT). Employers contributionin excess of 12% of salaryis treated as income of the employee and is taxable. In excess of 12%, the contributions are taxable in the year of contribution. Tax Deductionu/s. 80Cis available for amount invested by the employee(up to Rs 1.5 Lakh in a Financial Year). Interest amount earned (up to 9.5% interest rate) on PF balance (employees + employers contributions) is tax free.In excess of 9.5%, the interest on contributions is taxable as salary in the year in which it is accrued. Accumulated funds redeemed by the employee at the time of retirement / resignation are exempt from tax if he/she continues the service for5 yearsor more.Unrecognized Provident Fund (UPF) These are not recognized by Commissioner of Income Tax. Employers contribution is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free in the year of contribution. Tax deduction undersection 80c is not availableon Employees contributions. Interest earned is not treated as income in the year it is credited and hence not taxable in the year of accrual. At the time of redemption / retirement, the employers contributions and interest thereon is treated as salary income and chargeable to tax. However, employees contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.Public Provident Fund (PPF) Under PPF any individual from public, whether is in employment or not may contribute to this fund. The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh Rs. p.a. The amount is repayable after 15 years. PPF can serve as an excellent retirement planning / savings tool, for those who do not come under any pension scheme. The PPF offers tax benefit undersection 8OCand the interest earned is also exempt from tax. All the eligible withdrawals are exempted from taxes.

PENALTIES:If any person knowingly makes any false statement makes any false representation, OR Imprisonment for a term up to one year OR With a fine Rs. 5,000 Both In case of default to payment to the employees,Imprisonment for a term up to one year and a fine of Rs.10,000/-EPF vs PPF - Which is better?EPF and Public Provident Fund (PPF) are long term investment instruments for retirement. However, a lot of people are confused between these two. The PPF is a statutory scheme of the central government started with the objective of providing old age income security to the unorganized sector workers and self-employed persons. The EPF is a retirement benefit applicable only for salaried employees. It is a fund to which an employee and employer contribute 12 per cent every month (Pre-set by the government of India) of the employee's basic salary. Every year, the employer deposits with the EPFO the contribution from the employer and the employee. Knowingly or unknowingly, 24 per cent of your basic salary is saved every month.

WHAT IS GRATUITY?Gratuity is one of the least understood components of salary. InvestmentYogi explain everythingabout Gratuity and thetaximplications for you.Gratuity is a part ofsalarythat is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.

EligibilityAs per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year).How does it work?An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.Tax treatment of gratuityThe gratuity so received by the employee is taxable under the head Income from salary. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head Income from other sources. This tax treatment varies for different categories of individual assessees. We shall discuss the tax treatment of gratuity for each assessee in detail.

For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories Government employees and Non-government employees covered under the Payment of Gratuity Act, 1972 Non-government employees not covered under the Payment of Gratuity Act, 1972In case of government employees they are fully exempt from receipt of gratuity.In case of non-government employees covered under the Payment of Gratuity Act, 1972 Maximum exemption from tax is least of the 3 below:1. Actual gratuity received;2. Rs 10,00,000;3. 15 days salary for each completed year of service or part thereofNote: Here, salary = basic + DA + commission (if its a fixed % of sales turnover). Completed year of service or part thereof means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored. Here, number of days in a month is considered as 26. Therefore, 15 days salary is arrived as = salary * 15/26 In case of non-government employees not covered under the Payment of Gratuity Act, 1972 Maximum exemption from tax is least of the 3 below:1. Actual gratuity received;2. Rs 10,00,000;3. Half-months average salary for each completed year of service (no part thereof)Note: Here, salary = basic + DA + commission (if its a fixed % of sales turnover). Completed year of service (no part thereof) means: full time service of > 1 year is considered as 1 completed year of service. < 1 year is ignored. Average salary =10 months salary (immediately preceding the month of leaving the job)/10THE DIFFERENCEGratuity is paid out at the time of superannuation (if you retire at the age of 58), when you retire (at any other age) or resignation, and in the event of your death or being rendered disable because of an accident or illness. You need to have at least five full years of service with an employer to qualify for gratuity. This rule is relaxed in the last instance. In the event of your death, the gratuity will be paid to your nominee. Gratuity shall be calculated as per the below formula

Gratuity = Last drawn salary x x No. of years of service

Your last drawn salary will comprise your basic + DA+ commission on sales on turnover basis. For computation of gratuity, your service period will not be rounded off to the nearest full year. While calculating completed years, any fraction of the year will be ignored. For instance, if the employee has a total service of 20 years, 10 months and 25 days, only 20 years will be factored into the calculation.

PFProvident fund is a scheme by the Government of India by which:

*A fixed percentage is deducted from your salary and *A fixed percentage added by the company

This amount is kept in an account, which accumulates and is then received back after retirement.

Provident fund is basically a retirement benefit scheme. Under this scheme a stipulated sum is deducted from the salary of the employee as his contribution towards the fund. The accumulated sum along with the interest is paid to the employee at the time of his retirement or resignation. In case of death of the employee the accumulated balance is paid to his legal heirs