The tax rules governing the Employees’ Provident Fund (EPF) are complex. So, one needs to understand these so that one’s savings and retirement planning can be kept under control. It can also help you make better monetary decisions while maximising the EPF benefits.
Here is a brief explanation of all the tax statuses that will apply to contributions, interest, and withdrawals from the EPF, according to details from the Employees’ Provident Fund Organisation (EPFO).
1. Tax Exempt
Employee's Contributions: The amount the employees contribute to EPF is tax-exempt under Section 80C of the Income-tax Act, 1961, up to the limit of Rs 1.5 lakh in a fiscal year, under the old tax regime.
Employer's Contribution: Contributions made by the employer to the EPF are tax-free to the employee provided it does not exceed the prescribed limit (12 per cent of the salary of the employee or Rs 7.5 lakh in combination with other retirement fund contributions).
Interest on the contributions made to the EPF is tax-free provided it is not withdrawn before the completion of five years of continuous service.
Understand Different Tax Implications On Employees’ Provident Fund
Right from contribution to withdrawal, understand how tax exemption and liability will impact yourEPF corpus, thus helping you improve your retirement planning
2. Taxable
The amount withdrawn is treated as income liable to tax if EPF is withdrawn before the expiry of five years of continuous service. Tax will be applied in accordance with one’s income tax and tax will be deducted at source (TDS) at 10 per cent upon withdrawal, if amount withdrawn is more than Rs 50,000.
Interest On Excess Contribution: Where the total contribution by an employee, including the employer’s contribution, exceeds Rs 2.5 lakh in a financial year or Rs 5 lakh in case of only the employee’s contributions, then the interest earned on excess contributions are taxable under “Income from Other Sources”.
3. Partially Taxable
In specific cases, such as medical emergency or education or house construction, if EPF withdrawal takes place before five years of service, it attracts tax, but the same may be exempt depending on specific provisions. In most cases, the reason for the premature withdrawal and amount withdrawn will decide the tax treatment.
4. Tax-Free
The balance withdrawn, which will be both principal and interest, after completion of five years of continuous service is exempt from tax. Here, the retirement or the employment termination does not matter; it only counts on the completion of the service required under the prescribed rules.
The pensions obtained under Employees’ Pension Scheme are also totally exempt up to the threshold, if eligibility is established. These tax statuses are important to employees, as they will allow them to make informed decisions about their EPF account, and consequently, the effective management of their retirement planning.