Employees’ Provident Fund (EPF): What are the new tax rules you need to know?

based on an interview with Preeti Sharma, Partner/Global Employer Services, Tax & Regulatory Services – BDO IndiaThe spokesperson said, “Employees’ Provident Fund (EPF) is India’s most popular retirement financial planning and investment choice for individual taxpayers. EPF was earlier under tax free structure, ie EPF was tax free:

Investment Phase: When any contribution was made, a deduction of up to Rs 1.5 lakh could be claimed for the employee’s contribution under section 80C and the entire employer’s contribution up to 12% of the PF salary was exempted without any limit .

accrual stage: When interest is declared on accumulated balance

maturity stage: When amount is withdrawn from the fund subject to meeting the exemption criteria

Government of India has eliminated some of the above mentioned tax benefits by making following changes according to Preeti Sharma to boost National Pension Scheme and Tax High Net-Worth Individuals.

Tax rules on EPF contribution

Employee’s contribution to the EPF account is allowed as a deduction under section 80C, but within the overall limit of Rs 1.5 lakh. There is no change in this provision.

Employer’s contribution to an employee’s EPF account is exempt up to 12% of PF salary. With effect from 1st April 2020, any employer’s contribution towards provident fund (PF), NPS and retirement in excess of Rs 7.5 lakh per annum is taxable as perquisite to the employee under the head ‘Income from salaries’.

EPF tax rules on interest accrual

From April 1, 2022, any interest earned on employee’s contribution to EPF up to INR 2.5 lakh per annum is tax-free and any interest earned on contribution above INR 2.5 lakh is taxable for employees. The limit of Rs 2.5 lakh has been raised to Rs 5 lakh if ​​the employer is not contributing to EPF.

As per the notification issued by the Income Tax Department on August 31, 2021, Regional Provident Fund Commissioners (RPFCs) will maintain the EPF balance of individuals in two separate accounts for taxation purposes. Contribution within the limit of INR 2.5 Lakh / 5 Lakh in one account and the additional contribution along with the interest earned thereon will be kept in a separate taxable account. RPFC will deduct TDS on such interest paid on the account maintaining taxable contribution.

Further, in addition to the contribution made by the employer in excess of INR 7.5 lakh per annum, which is taxable as perquisite to the employees, any interest, dividend etc. earned from such additional contribution will be taxed. Employee’s

Rule 3B has been introduced by the Income Tax Department to lay down how the interest, dividend etc. on the above contribution will be calculated. Employers will also have to withhold tax on such earnings.

In addition, employers will also have to provide details of such accumulations and taxes withheld in Form 16 and Form 12BA issued to the employees.

Tax rules on EPF withdrawal

In case of withdrawal of accumulated balance in EPF after 5 years of continuous service, no tax is required to be paid on the contribution amount and accumulated interest.

However, if the accumulated balance is withdrawn before completion of 5 years of continuous service (as permitted by RPFC under prescribed circumstances), the balance amount and interest will not be fully exempted from tax. Tax on such withdrawal will be calculated as follows:

a) Employer’s contribution and corresponding interest

The employer’s contribution and the interest thereon is fully taxable in the hands of the employee under the head ‘Income from salaries’ in the individual’s income tax return.

b) Employee’s contribution

In cases where deduction under section 80C is claimed at the time of contribution, the amount of employee’s contribution will be taxable as ‘income from salary’. In other cases, the amount withdrawn from the employee’s contribution may not be taxable.

c) Interest on employee’s contribution

The amount of interest earned on employee’s contribution to EPF will be taxable as ‘Income from other sources’ in the hands of the employee.

RPFC will deduct TDS at the rate of 10% on the total amount withdrawn (if it exceeds INR 50,000) before completion of 5 years of continuous service.

Impact and Budget Expectations

Despite the above changes, EPF still remains the most preferred and preferred retirement planning scheme for most of the individual taxpayers. The above changes may not affect individuals who are earning basic salary up to Rs 20 lakh and contributing 12% of their basic salary towards EPF. Most of the people in India fall in this category.

While it is expected that the above provisions on EPF taxation may not change in the Union Budget for 2023, there is an expectation that the deduction limit available under section 80C may be increased from the existing limit of Rs 1.5 lakh, Preeti Sharma he said.