The Employee Provident Fund (EPF) is an great tool for salaried to accumulate funds for their retirement. Income tax has implications at the time of contributions, interest earned as properly as withdrawal of balance.
Let us talk about the earnings tax implications of EPF contributions and withdrawals.
Contribution stage
The employer deducts you EPF contribution @ 12% of your standard salary at the time of payment of the salary. All the persons whose standard salary is upto Rs 15,000 are mandatorily covered beneath EPF. For these above this threshold it is voluntary. However, as soon as opted in, you can’t opt out from the identical employer. In case the standard salary exceeds Rs 15,000, the employer has the choice to restrict the deduction on 12% of Rs 15,000/- as an alternative of deducting it on entire of the standard salary. The employer also matches the contribution by an equal quantity.
For the EPF contribution deducted by your employer, you are entitled to claim the quantity of PF deduction beneath Section 80C upto Rs 1.50 lakh just about every year along with other eligible things like life insurance coverage premium, repayment of house loan, National Saving Certificates, ELSS, tuition charge for young children and so on. An employee can contribute far more than what minimum is needed but the deduction will be restricted to the maximum of Rs 1.50 lakh beneath Section 80C.
The employer gets deduction for the quantity contributed towards EPF of workers as company expenditure. There is no tax liability for the employee in respect of contribution created by the employer upto 12% of the standard salary beyond which it becomes taxable in the hands of the employee. Likewise in case the aggregate quantity of the contribution created by the employer towards workers EPF, Superannuation or NPS account of the employee taken collectively exceeds Rs 7.50 lakh, such excess becomes taxable in the hands of the employee.
Interest accrued on the balance in EPF
The interest credited to the Provident Fund account is tax-absolutely free as lengthy as one particular is employed. However, as soon as the employee retires, the quantity of interest credited to his EPF account becomes taxable and is needed to be presented for tax beneath the head “Income from other sources.”
Taxability of EPF withdrawal
The whole balance lying in the EPF account is completely tax-absolutely free in your hands unless you have withdrawn the balance in your EPF account exactly where contribution has not been created for a minimum period of 5 years. Please note for enjoying exemption on EPF withdrawal, it is not the time for which the account is maintained but the quantity of months for which EPF contributions have been created which entitles you for the exemption.
In case the EPF balance becomes taxable in your hands due to premature withdrawal, tax will be deducted @ 10% on the whole balance in case the accumulated balance payable to the employee is fifty thousand rupees or far more. However, in case you do have Permanent Account Number (PAN) or do not furnish the identical to the particular person accountable for paying the quantity, the payer will deduct tax @ 30%. Please note that tax deduction and discharge of your tax liability are two unique and distinct points. So, you could have to spend far more tax in case the slab price applicable to your earnings is far more than 10%. Likewise in case you do not have any tax liability or the tax liability on your total earnings such as such withdrawal is much less than 10%, you could get refund of the tax deducted on your EPF withdrawal.
As far as the head beneath which the accumulated balance withdrawal will be taxed, if it is withdrawn prior to 5 years, is concerned, the portion representing the employer’s contribution along with accrued interest thereon shall turn out to be taxable beneath the head “Salaries”. However, your contribution along with interest thereon will be taxed beneath the head “Income from other Sources.”
Please note that in case you had not claimed deduction for your contribution beneath Section 80C, you want not give your portion of contribution towards the EPF account for tax and only give the interest on that portion for taxation.
I am certain now you know when you get the tax advantages for your EPF contribution and when you have to spend tax on your EPF withdrawals.
(The writer is a tax and investments professional. He can be reached at [email protected])