Taxation of Employee Provident Fund

[student_of_law]

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