Taxation · Salaries

Provident Funds and Other Salary-Related Receipts: Taxability for CA Inter

Updated 5 October 2026 · Fact-checked

Taxability of provident funds depends on the fund type. PPF interest and maturity are exempt; deposits are capped at ₹1,50,000 a year. Statutory PF is exempt, subject to the excess-contribution interest rule. In a recognised fund, employer contribution above 12% of salary and interest above 9.5% are taxable. An unrecognised fund is taxed on payment.

Understand Provident Funds and Other Salary-Related Receipts

A provident fund is a retirement saving scheme. The employee puts in a part of salary and the employer usually adds a matching amount. The money earns interest and is paid out later. Tax can arise at three points: when the employer contributes, when interest is credited, and when the money is withdrawn. Your job is to check each point for the type of fund.

There are four types. Statutory provident fund (for example the GPF of government staff) and Public Provident Fund (PPF) are the most favoured: the interest and the withdrawal are exempt. For a statutory PF, this is subject to the excess-contribution interest rule explained below. PPF has no employer contribution, and deposits are limited to ₹1,50,000 per year. The excess-contribution interest rule below does not apply to PPF. The employee's own contribution is paid out of taxable salary. It is only eligible for a deduction in the old regime. Recognised provident fund (RPF) is approved under the rules, so it gets limited exemptions. Unrecognised provident fund has no approval, so tax comes mostly at the time of payment.

For a recognised fund, think in limits. Employer contribution is exempt up to 12% of salary. Here salary means basic pay, dearness allowance (only if it forms part of pay for retirement benefits) and commission based on a fixed percentage of turnover. Interest is exempt up to a notified rate of 9.5% per year. Anything above these limits is taxed as salary. The lump sum on withdrawal is exempt if the employee has completed 5 years of continuous service, or if service ended for reasons such as ill health, business contraction or other causes beyond the employee's control, or if the balance moves to another recognised fund or to the new employer's fund.

Interest on the employee's own contribution has a separate limit. It applies to the employee's own contributions to a provident fund (statutory or recognised) in the year, and not to PPF. If these are above ₹2,50,000 (the limit where the employer also contributes to the fund), the interest on the excess contribution is taxable. The limit is ₹5,00,000 where there is no employer contribution to the fund. This interest is kept in a separate account and taxed as income from other sources. It does not enter the 12%/9.5% working.

For NPS, the employer's contribution is first part of your salary income. Then a deduction is allowed for employer contribution up to a percentage of salary (basic plus DA). The limit is 14% for government employees in both regimes, and for all employees in the new regime. The limit of 10% applies only to non-government employees in the old regime. On exit, the lump sum up to 60% of the corpus is exempt, and the 40% used to buy an annuity is not taxed at that time. The annuity pension received later is taxable. For approved superannuation fund, the employer contribution is not taxed within limits, and payment on retirement, death or incapacity is exempt.

In an unrecognised fund, nothing is taxed on the yearly contribution, but the payout is split. The employee's contribution is not taxed in the payout, because it was made out of salary that was already taxed. Where the employee's contribution was earlier allowed as a deduction, it is taxed in the year of withdrawal only to the extent the Act provides for it. Interest on the employee's contribution is taxed as other sources. The employer's contribution and its interest are taxed as profits in lieu of salary.

There is also one overall cap. The aggregate of the employer's contributions to RPF, NPS and approved superannuation fund for the year is tested against ₹7,50,000. Count the contributions made in the year to all three funds together, whether or not each one is within its own individual limit. The excess over ₹7,50,000, and the yearly interest or growth on that excess, is taxed as a perquisite. Do not tax the same amount twice. Any part that is already taxed because it exceeds an individual limit (for example RPF contribution above 12% of salary) is not taxed again under the ₹7,50,000 cap.

Key rules to remember

Salary for the 12% limit (RPF): Salary = Basic + DA (if it forms part of retirement benefits) + Commission as a fixed % of turnover; Do not add bonus, allowances like HRA, or perquisites.
RPF employer contribution: Taxable = Employer contribution − 12% × Salary (if positive); The excess is taxed as salary. The employee's own contribution has no 12% cap; it is only eligible for deduction (old regime) within the savings limit.
RPF interest: Taxable interest = Interest credited − Interest at 9.5% p.a.; Only the excess over the notified rate is taxed as salary. Interest is worked on the running balance, so use the monthly balances or the base the question gives.
Interest on the employee's contribution above the yearly limit: Interest on the employee's own contributions to a statutory or recognised provident fund in the year above ₹2,50,000 is taxable. The limit is ₹5,00,000 where there is no employer contribution to the fund.; Does not apply to PPF. Kept in a separate account and taxed as income from other sources, so it does not enter the 12%/9.5% working.
Statutory PF: Interest and withdrawal: exempt, subject to the excess-contribution interest rule (interest on the employee's own contributions above the yearly limit is taxable); The employee's own contribution is paid from taxable salary and is eligible for a deduction in the old regime only.
PPF: Deposits: limited to ₹1,50,000 per year. Interest and maturity amount: exempt; PPF has no employer contribution. The ₹2,50,000/₹5,00,000 excess-contribution interest rule does not apply to PPF. The deposit is paid from taxable salary and is eligible for a deduction in the old regime only.
Unrecognised PF: On payment: Employee contribution = not taxed in the payout; Interest on employee contribution = other sources; Employer contribution + its interest = profits in lieu of salary; Nothing is taxed yearly. Tax is on the payout. The employee's contribution came from taxed salary. Where it was earlier allowed as a deduction, it is taxed in the year of withdrawal only to the extent the Act provides for it.
NPS employer contribution: Deduction = lower of Employer contribution and (10% or 14%) × (Basic + DA); 14% for government employees in both regimes, and for all employees in the new regime. 10% only for non-government employees in the old regime.
NPS exit: Lump sum up to 60% of corpus: exempt; Annuity pension: taxable when received; The 40% used to buy an annuity is not taxed at purchase.
Overall cap on employer contributions: Taxable perquisite = (Employer contributions for the year to RPF + NPS + Superannuation) − ₹7,50,000 (if positive), plus yearly interest or growth on the excess; Test the aggregate of all employer contributions to the three funds, whether or not each is within its individual limit. An amount already taxed because it exceeds an individual limit is not taxed again under the cap.
RPF early withdrawal (less than 5 years, no valid reason): Employer contribution + interest on it: salary; Employee contribution: not taxed again; Interest on employee contribution: other sources; Where the employee's contribution was earlier allowed as a deduction, it is taxed in the year of withdrawal only to the extent the Act provides for it.

How to solve Provident Funds and Other Salary-Related Receipts questions

Use this order for any question on provident funds, NPS or superannuation. Stop at each stage and decide: exempt, taxable or capped.

1Identify the fund type: statutory, public, recognised, unrecognised, NPS or approved superannuation fund.
2Identify the stage being asked: employer contribution, interest credit or withdrawal.
3Work out salary for the limit: basic + DA (only if it counts for retirement benefits) + commission as a fixed percentage of turnover. Leave out other allowances and bonus.
4Apply the limit for that fund: 12% for RPF employer contribution, 9.5% for RPF interest, and for the NPS employer deduction 14% (government employees in both regimes, and all employees in the new regime) or 10% (non-government employees in the old regime only).
5Test the overall ₹7,50,000 cap on the aggregate of the employer's contributions for the year to RPF, NPS and superannuation, whether or not each is within its individual limit. Tax any excess over the cap, and its interest or growth, as perquisite. Do not tax again any amount already taxed because it exceeded an individual limit.
6For withdrawals, check the 5-year rule or the valid-reason exceptions, then place each part (employer, employee, interest) under the right head.
7Add the taxable amounts to salary (or other sources where stated). Mention the regime if you claim any deduction.

Quickest way: Fund-by-fund checklist

When to use it: Use for MCQs and for the first line of a written answer when time is short.

MCQ: if the option says PPF, think interest and maturity exempt, with deposits capped at ₹1,50,000 a year. If it says statutory PF, think interest and withdrawal exempt (subject to the excess-contribution interest rule). Eliminate options that tax them.
MCQ: for RPF, compute 12% of (basic + DA) and 9.5% interest first. The answer is the excess over each limit, and the options usually show these two numbers.
MCQ: for unrecognised fund, remember that nothing is taxed until payment, then split the payout into three parts.
MCQ: for NPS, include the employer contribution in gross salary first, then deduct the limited amount. Do not forget this inclusion.
Written answer: use a small table in your working with columns Fund type, Item, Exempt amount and Taxable amount. Write the rule next to each line, because step marks are awarded for the rule and for the working.
Always write the final taxable figure under 'Salaries' or 'Income from other sources' so the head is clear.

Common mistakes in Provident Funds and Other Salary-Related Receipts

Taking 12% on total pay including HRA, bonus and all allowances
Students read 'salary' in the everyday sense.
Fix: For this limit use basic + DA (only if it counts for retirement benefits) + commission on turnover only.
Treating the whole employer contribution to RPF as taxable, or the whole as exempt
Students forget that the limit applies and only the excess is taxed.
Fix: Compute 12% of salary, compare with the actual contribution, and tax only the excess.
Taxing all interest credited in RPF
Students forget the 9.5% rate limit.
Fix: Compute interest at 9.5% on the balance and tax only the excess over it.
Taxing the employee's own contribution in an unrecognised fund on withdrawal
Students think everything in the payout is income.
Fix: The employee's contribution is not taxed in the payout, because it was made from salary that was already taxed. Where it was earlier allowed as a deduction, it is taxed in the year of withdrawal only to the extent the Act provides for it. Only the interest on it is income (other sources). The employer's share and its interest go under salary.
Deducting NPS employer contribution without first including it in salary
Students think that an exempt contribution never enters salary.
Fix: Add the full employer contribution to gross salary, then deduct the allowed amount. The net effect is that only the excess is taxed.
Ignoring the ₹7,50,000 combined cap, testing it on only part of the contributions, or taxing the same amount twice
Students apply each limit separately and stop, add up only the part that stayed within the individual limits, or tax an excess under both the individual limit and the cap.
Fix: Add the full employer contributions for the year to RPF, NPS and superannuation, whether or not each is within its own limit. Tax any excess over ₹7,50,000, and its interest or growth, as perquisite. Do not tax again an amount already taxed because it exceeded an individual limit.

Worked examples

Example 1

Rahul is employed in a private company that has a recognised provident fund. His basic pay is ₹40,000 per month and DA is ₹10,000 per month (it forms part of pay for retirement benefits). The employer contributes ₹6,600 per month. Interest is credited on the opening balance of Rahul's account only, which is ₹6,00,000 (including his own contributions), so contributions made during the year earn no interest this year. The interest credited to Rahul's account for the year is ₹60,000 (rate 10%). Rahul's own contribution for the year is not asked for in this question. Find the amount taxable under the head Salaries on account of the provident fund.

Show the solution

Salary for the limit = (₹40,000 + ₹10,000) × 12 = ₹6,00,000.
Exempt employer contribution = 12% × ₹6,00,000 = ₹72,000.
Actual employer contribution = ₹6,600 × 12 = ₹79,200.
Taxable employer contribution = ₹79,200 − ₹72,000 = ₹7,200.
Interest is credited on the opening balance of Rahul's account only, so the base is ₹6,00,000. This balance includes his own contributions as well as the employer's. Check: 10% × ₹6,00,000 = ₹60,000, which matches the interest credited to Rahul's account.
Interest exempt at 9.5% on ₹6,00,000 = ₹57,000.
Taxable interest = ₹60,000 − ₹57,000 = ₹3,000.
Total taxable = ₹7,200 + ₹3,000 = ₹10,200. The employer's contribution of ₹79,200 is well below the ₹7,50,000 aggregate cap, so no perquisite arises under the cap.

Answer: ₹10,200 is taxable under Salaries. The ₹60,000 is the interest credited to Rahul's account for the year, worked on a balance that includes his own contributions. His own contribution for the year is not part of this working. It may be eligible for deduction in the old regime.

Example 2

Meera, a private-sector employee, has basic pay of ₹8,00,000 and DA of ₹1,00,000 for the year (DA forms part of pay for retirement benefits). Her employer contributes ₹1,40,000 to her NPS account. Find the deduction for the employer contribution under (a) the old regime and (b) the new regime. Assume other employer contributions to RPF and superannuation are nil.

Show the solution

Salary for the limit = ₹8,00,000 + ₹1,00,000 = ₹9,00,000.
The full ₹1,40,000 is first included in her gross salary.
(a) Old regime, non-government employee: limit = 10% × ₹9,00,000 = ₹90,000. Deduction = lower of ₹1,40,000 and ₹90,000 = ₹90,000.
(b) New regime: limit = 14% × ₹9,00,000 = ₹1,26,000. Deduction = lower of ₹1,40,000 and ₹1,26,000 = ₹1,26,000.
The ₹7,50,000 combined cap is not exceeded, since the employer contributions total ₹1,40,000.
Net effect: ₹1,40,000 − ₹90,000 = ₹50,000 is taxed in the old regime and ₹1,40,000 − ₹1,26,000 = ₹14,000 in the new regime.

Answer: Deduction is ₹90,000 under the old regime (10% limit for non-government employees) and ₹1,26,000 under the new regime (14% limit). The net amount taxed is ₹50,000 and ₹14,000 respectively.

Exam tips

Always start with the fund type. Most wrong answers come from using RPF rules for an unrecognised fund or the reverse.
Show the 12% and 9.5% workings as separate lines. Examiners give marks for each limit even if the final figure is wrong.
In NPS questions, state the regime and whether the employee is a government or non-government employee. The employer deduction limit depends on both, and a missing statement loses marks.
Remember the three-part split for an unrecognised fund payout. A question often gives one lump sum and expects you to break it into employee, employer and interest parts.
Check the years of service in withdrawal questions. If it is below 5 years, look for a valid reason before deciding on taxability.

Practice questions from Salaries

Provident Funds and Other Salary-Related Receipts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Provident Funds and Other Salary-Related Receipts: frequently asked questions

Is the interest on PPF taxable?

No. Interest on a Public Provident Fund account is exempt, and the maturity amount is exempt too. PPF deposits are limited to ₹1,50,000 per year, and PPF has no employer contribution. The employee's own deposit may qualify for a deduction in the old regime, within the savings limit.

What is the difference between recognised and unrecognised provident fund?

A recognised fund is approved under the rules, so employer contribution up to 12% of salary and interest up to 9.5% are exempt. An unrecognised fund has no approval, so nothing is taxed yearly. On payment, the employer's share and its interest are taxed as salary, interest on the employee's share is taxed under other sources, and the employee's own contribution is not taxed again.

Is the employer's contribution to NPS taxable?

It is included in your salary, then a deduction is allowed up to a percentage of basic plus DA. The limit is 14% for government employees in both regimes and for all employees in the new regime. It is 10% only for non-government employees in the old regime. Only the amount above the limit stays taxable. It also counts towards the combined ₹7,50,000 cap.

Is the superannuation fund payout taxable?

Payment from an approved superannuation fund on retirement, death or incapacity is exempt. On a payment in any other case, such as resignation, the employer's contributions and the interest on them are taxable as profits in lieu of salary, and the interest on the employee's contributions is taxed as other sources. Annuity pension received from the fund is taxable as salary when received.