The Employees' Provident Fund (EPF) is a retirement savings programme offered by the Employees' Provident Fund Organisation (EPFO).
Employers may have previously made tax-free contributions of up to 12%. In Budget 2021–2022, the Indian government changed the IT Act to make interest on EPF taxable.
The Government of India firmly stated that the goal of the new EPF tax rules was to stop high-income taxpayers from dramatically increasing their required EPF contribution to lower their tax obligations.
Previously, employers could contribute up to 12% tax-free. The Indian Government amended the IT Act in Budget 2021-22 to make interest earned on EPF taxable. Let’s understand in detail the old and new EPF tax rules.
Old Tax Provision Under Section 80C of the Income Tax Act 1961, employees who contribute to EPF can claim tax deductions. The tax benefit is limited to Rs. 1.5 lakh. Before the new tax regime, employers could contribute up to 12% tax-free. Contributions exceeding 12% were taxable. Furthermore, EPF account holders were not taxed on their interest income.
New Tax Provision The Government of India amended the IT Act in Budget 2021-22 to make interest earned on EPF taxable. Employees who contribute more than Rs. 2.5 lakh to EPF each year are subject to this rule. This provision was intended to prevent high-income earners from receiving undue benefits from the scheme. A tax will be imposed only on excess contributions over the prescribed threshold, not on the total contribution.
There will now be two categories of EPF accounts maintained by the PF trust: taxable and non-taxable. Contributions below Rs. 2.5 lakh are not taxable, and contributions above Rs. 2.5 lakh are taxable.
Employees will be taxed on the employer's contributions to the NPS, EPF, and superannuation funds exceeding Rs. 7.5 lakh.
The following formula can be used to calculate non-taxable contributions:
Taking the following into account:
(A) The closing balance in the EPF account, any contributions below Rs. 2.5 lakh or Rs. 5 lakh in the new financial year, and interest accrued on the closing balance
(B) Any withdrawal from these accounts
Non-taxable contribution = (A-B)
Total of the following:
(A) If an individual contributes more than Rs. 2.5 lakh or Rs. 5 lakh in any financial year, interest is accrued on such contributions. (B) Withdrawal from these accounts Taxable contributions = (A-B)
Using this formula, one can calculate an individual's taxable contribution.
Tax on EPF will only apply to contributions made by employees over and above the threshold. Employees with PF accounts will be responsible for paying tax on EPF. According to calculations, this EPF tax rule change will only affect those earning more than Rs. 20.83 lakh. Thus, only certain high-income earners will have to assess the new provisions' impact.
In introducing these new EPF tax rules, the Government of India categorically stated that its purpose was to prevent high-income earners from contributing significantly more than their mandated contribution to EPF. This approach is used by many high-income earners to reduce their tax liability. To implement these new EPF tax rules, the CBDT (Central Board of Direct Taxes) has added a new section to the Income Tax Rules 1962.
The government changed the tax rule in order to broaden the tax base and collect more direct taxes. This may help tax administrators to close a loophole in tax laws that many people use to avoid taxes. People must seek out alternative investment options offering tax deductions and stable returns in order to maintain their disposable income. A reputable financial services provider, Kotak Securities, can help you explore investment options and guide you in financial decisions.
The TDS is deducted at 10% of the EPF balance if the withdrawal is made before the five-year service period and the amount is over Rs. 50,000. At the time of withdrawal, make sure you mention your PAN. In the absence of PAN, TDS will be deducted at the highest slab rate of 30%.
After five years of continuous service, EPF withdrawals are tax-free. If you withdraw your EPF balance before completing five years of continuous service, you will have to pay tax on your EPF.
PF funds cannot be withdrawn, partially or fully, until an individual is employed. Unemployed individuals can withdraw up to 75% of their funds if they are unemployed for at least one month and the balance if they are unemployed for two months or more.
Employees earning a basic salary up to Rs. 15,000 per month are required to contribute to the EPF. It is also possible for employees who earn a higher salary to contribute to the EPF scheme voluntarily.
It is not mandatory to withdraw the PF amount after resignation. The PF account will continue to earn interest if you do not withdraw it after your resignation.
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