The entire balance lying in the EPF account is fully tax-free in your hands unless you have withdrawn the balance in your EPF account where contribution has not been made for a minimum period of 5 years.The Employee Provident Fund (EPF) is an excellent tool for salaried to accumulate funds for their retirement. Income tax has implications at the time of contributions, interest earned as well as withdrawal of balance.
Let us discuss the income tax implications of EPF contributions and withdrawals.
Contribution stage
The employer deducts you EPF contribution @ 12% of your basic salary at the time of payment of the salary. All the persons whose basic salary is upto Rs 15,000 are mandatorily covered under EPF. For those above this threshold it is voluntary. However, once opted in, you cannot opt out from the same employer. In case the basic salary exceeds Rs 15,000, the employer has the option to restrict the deduction on 12% of Rs 15,000/- instead of deducting it on whole of the basic salary. The employer also matches the contribution by an equal amount.
For the EPF contribution deducted by your employer, you are entitled to claim the amount of PF deduction under Section 80C upto Rs 1.50 lakh every year along with other eligible items like life insurance premium, repayment of home loan, National Saving Certificates, ELSS, tuition fee for children etc. An employee can contribute more than what minimum is required but the deduction will be restricted to the maximum of Rs 1.50 lakh under Section 80C.
The employer gets deduction for the amount contributed towards EPF of employees as business expenditure. There is no tax liability for the employee in respect of contribution made by the employer upto 12% of the basic salary beyond which it becomes taxable in the hands of the employee. Likewise in case the aggregate amount of the contribution made by the employer towards employees EPF, Superannuation or NPS account of the employee taken together 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-free as long as one is employed. However, once the employee retires, the amount of interest credited to his EPF account becomes taxable and is required to be offered for tax under the head “Income from other sources.”
Taxability of EPF withdrawal
The entire balance lying in the EPF account is fully tax-free in your hands unless you have withdrawn the balance in your EPF account where contribution has not been made for a minimum period of 5 years.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 number of months for which EPF contributions have been made 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 entire balance in case the accumulated balance payable to the employee is fifty thousand rupees or more. However, in case you do have Permanent Account Number (PAN) or do not furnish the same to the person responsible for paying the amount, the payer will deduct tax @ 30%. Please note that tax deduction and discharge of your tax liability are two different and distinct things. So, you may have to pay more tax in case the slab rate applicable to your income is more than 10%. Likewise in case you do not have any tax liability or the tax liability on your total income including such withdrawal is less than 10%, you may get refund of the tax deducted on your EPF withdrawal.
As far as the head under which the accumulated balance withdrawal will be taxed, if it is withdrawn before five years, is concerned, the portion representing the employer’s contribution along with accrued interest thereon shall become taxable under the head “Salaries”. However, your contribution along with interest thereon will be taxed under the head “Income from other Sources.”
Please note that in case you had not claimed deduction for your contribution under Section 80C, you need not offer your portion of contribution towards the EPF account for tax and only offer the interest on that portion for taxation.
I am sure now you know when you get the tax benefits for your EPF contribution and when you have to pay tax on your EPF withdrawals.
(The writer is a tax and investments expert. He can be reached at jainbalwant@gmail.com)
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