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Taxation of Employee Provident Fund - Printable Version

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Taxation of Employee Provident Fund - beyond.spirits - 07-21-2011

We are going to start employee provident fund from next month. I have few confusions that I hope someone will clearify here.

1- do the contributions made by employer are treated as a part of employee's salary? if yes then do we need to deduct tax at source on this amount?

For example

If an employee's monthly gross salary is Rs. 43000 and he makes contribution of 10 % of his gross salary i-e Rs. 4300 and employer contributes same amount Rs. 4300 . Now the question is how to deduct tax at source on employee's salary? on Rs. 43000 or on Rs. 43000 + Employer's contribution?

2- If we donot deduct tax at source on employer's contribution then when and how do we deduct tax and at what rate?

3- How to get EPF approved (Procedure)? what is the benefit of getting it approved? and what if we dont get it approved?

Please help!!!!!!

- waqarhassan - 07-21-2011

Employer's contribution will not be added to employee's salary and no tax is charged to it at time of contribution from employee.

Subsequently at the time of payment to employee from provident fund following procedure will be adopted

- If EPF is registered with tax commissioner, no tax will be levied at any amout at the time of payment to employee. its exempt

- If EPF is unregistered then employers contribution+ total interest income credited to employee's account is added to the salary of employee in that year in which payment is made, and its accordingly taxed in salary income.

Benefit of getting fund registered are
1) Employers contribution and interest becomes exempt from tax and its benefit to employee.
2) Employer can charge its contribution to fund as an expense in its accounts, otherwise for unregistered funds this expense in inadmissible for employer.

Hope it sloves ur problem!

- beyond.spirits - 07-21-2011

thank you very much sir, yes problem is solved. )

- student_of_law - 07-22-2011

One additioanl information - According to Rule 3 of Part I of Sixth Schedule of the Income Tax Ordinance, 2001

If employer's annual contribution to a provident fund in respect of certain employee exceeds one lac (100,000) or 10% of the salary of employee, whichever is low, then the amount exceeding 10% or 100,000 shall be treated as income of employee and tax is payable thereon

For the purpose of Sixth Schedule, salary means "basic salary + dearness allowance" only. [Rule 14(h) of Part I of Sixth Schedule)

For the purpose of deduction of tax at source, the employer will estimate the employee's annual income by adding such part of employer contribution that exceeds 100,000 or 10% of employee's salary.

For example an employee's annual salary is Rs.5 million
Employer's contribution to the provident fund is Rs.2.5 lac

Now contribution of employer exceeding one lace is 2.5 - 1 = 1.5 lac

so the employee's annual salary will be taken as 5 million + 1.5 lac = 5150,000

Tax rate on 5,150,000 will be worked out and employer wil deduct tax at source accordingly

You may get almost complete information about Provident Fund, taxation and exemptions and other rules, from
i. Part I of Sixth Schedule of ITO, 2001 regarding Recognized
Provident Funds
ii. Part I of Second Schedule to ITO, 2001
iii. Section 21
iv. Section 12

- beyond.spirits - 07-22-2011

Thank you very much once again @ Student of Law. Can you please guide me regarding procedure of getting EPF approved from Commissioner.

- student_of_law - 07-22-2011

Rule 91 of Income Tax Rules 2002 gives the detail procedure for applying for recognition of provident fund.

Generally, following documents are filed

Application by the Trustees for recognition containing such particulars as mention in Rule 91(1)(a)j
Application shoule be annexed with verification as given in Rule 91(2)
Application should be accompanied by Copy of Provident Fund Trust Deed and Rules, attested by notary public

I will advise you not to submit original trust deed at the counter. Instances of loss of documents at FBR is not uncommon. So just file the copy of turst deed of provident fund attested by notary publice. Later on objection being made, or before that if you could identify the concerned officer, show the original to the concerned officer.

In addition to the provisions mentioned in my last post, Rules 91 to 107 of Income Tax Rules, 2002 also covers the issues of provident fund.