Income From Salary Chapter- 07
- Introduction:
From salary of employee, a certain amount is deducted every month on account of provident fund.
Employer also contributes the same amount in the provident fund. At the time of retirement of
employee, accumulated balance in the provident fund consisting of employee’s contribution,
employer’s contribution and interest on fund is paid to employee for his benefit.
Types of Provident Funds:
There are three types of provident funds
Provident Fund formed under the Provident Fund Act, 1925.
Recognized Provident Fund under the Income Tax Ordinance, 2001.
Unrecognized Provident Fund under the Income Tax Ordinance, 2001.9.1 Provident Fund Formed under Provident Fund Act, 1925
A fund formed under the provisions o the Provident Act, 1925 is also named as Statutory Fund. Such
type of fund is generally formed by the Federal Government, Semi Government Institutions and Local
Authorities etc.
In this type of fund subscription or deposits of any class or classes of employees are received and
held on their individual accounts, and includes any contributions and any interest or increment
accruing on such subscriptions, deposits or contributions under the rules of the Fund. [The Provident
Funds Act, 1925 Section 2(d)]9.2 Recognized Provident Fund and Unrecognized Provident Fund:
Any provident fund recognized by CIR is called recognized provident fund and if it is not recognized
by the CIR, then it is called unrecognized provident fund.- Taxation of Provident Fund:
Provident Fund Formed under Provident Fund Act, 1925
Any amount received from Provident fund to which the Provident Funds Act, 1925 applies is
fully exempt from tax. [Clause 2 2 of Part I 2nd Schedule of Income Tax Ordinance, 2001]. Recognized Provident Fund under the Income Tax Ordinance, 2001
In case of recognized provident fund, following shall be included in the income of employee in
every tax year [Clause 3 of Part I of sixth schedule to Income Tax Ordinance, 2001].
(a) Contributions made by the employer less lower of one-tenth of the salary or Rs.1 5 0,000;
and(b) Interest credited on the balance of provident fund less higher of:- 1/3 of salary (basic salary + dearness allowance); OR
- Interest calculated @ 16% p.a. (Reference note attached)
Although under the aforesaid clause there is no rate of interest has been given however the
Federal Government vide its SRO No. 1097(I) 84 dated 27 - 12 - 1984 fixed the rate of interest at
16% for the purposes of interest calculation.
Accumulated balance due and becoming payable to an employee from a recognized
provident fund is exempt. [U/c 23 of Part I 2nd Schedule to the Income Tax Ordinance, 2001] Unrecognized Provident Fund under the Income Tax Ordinance, 2001
An unrecognised provident fund is the fund which is neither recognised nor statutory. Income of
the said provident fund is taxable to the extent defined in section 12(2)(e) which states that:
from a provident fund or other fund, to the extent to which the amount is not a repayment of
contributions made by the employee to the fund in respect of which the employee was not
entitled to a deduction;