Last updated: October 23rd, 2024 4:58 PM

Tax on Provident Fund (EPF)

In Tax on Provident Fund, Employees can deduct up to ₹1.5 lakh under Section 80C, while employers can contribute 12% of their salary tax-free to the Provident Fund. The provisions of sections 10(11) and 10(12) of the Income Tax Act exempted income received from Provident Fund. However, the amendment introduced in the Finance Act, 2021 came up with the provisions according to which the interest income received from the Provident Fund contribution will now be taxable if the same exceeds the prescribed limit. The present article briefly covers the tax on provident fund, amendments introduced in the Finance Act, 2021, and the insertion of new rule 9D in the Income Tax Rules.

What is EPF?

The Employees' Provident Fund (EPF) is a government-managed savings scheme for employees in India, aimed at ensuring financial security after retirement. Under this scheme, employees and employers contribute a portion of the employee's monthly salary to the EPF account. The accumulated funds and interest can be withdrawn upon retirement or under certain circumstances like unemployment, medical emergencies, or buying a home. EPF provides retirement benefits and tax-saving advantages, making it an essential part of an employee's financial planning. It is necessary to understand the income tax on PF to navigate the tax obligations on Provident Fund.

EPF Amendment introduced vide the Finance Act 2021-

Section 10(11) and Section 10(12) fully exempted interest accrued on the contribution made by the employee to the ‘Recognized Provident Fund’ and ‘Statutory Provident Fund’. This offers a benefit of income tax on PF. However, vide the Finance Act, 2021, a proviso is inserted to section 10(11) and section 10(12) of the Income Tax Act. The gist of the amendment taxing the interest income from the tax on Provident Fund is as follows-

• Interest accrued, during the previous year, under the ‘Recognized Provident Fund’ and ‘Statutory Provident Fund’ extends the exemption limit.
• Interest relates to the contribution made by the employee.
• Exemption limit above which interest would be taxable is-

Particulars	Exemption limit above which interest income is taxable
When the contribution includes the employer’s contribution	INR 2,50,000
When the contribution doesn’t include the employer’s contribution	INR 5,00,000

• The amendment is effective from the Assessment Year 2022-2023 (The previous Year 2021-2022).
• As per the amendment, the manner of computation of taxable interest for income tax on PF would be prescribed later.

Manner of computation of taxable interest on Provident Fund contribution-

Income Tax (25^th Amendment) Rules, 2021 is introduced vide notification dated 31^st August 2021. The said amendment came up with the new rule 9D which dealt with the manner of calculation of taxable interest. Accordingly, the same will be calculated as for tax on provident fund-

1. Firstly, from the previous year 2021-2022, two separate accounts will be maintained for determining the following types of the contribution made by the person to determine the obligations of income tax on PF-

• Taxable contribution; and
• Non-taxable contribution.

2. Post determination of taxable and non-taxable contribution, interest accrued in the taxable contribution will be taxed when the interest is above the threshold limit.

Going through the above paras, one will find that the terms ‘taxable contribution’, ‘non-taxable contribution’, and ‘threshold limit’ is important. Explanation to rule 9D explains all three terms. The terms are explained hereunder- ‘Taxable Contribution’ means the total of the following:

1. A contribution made by the person in the Provident Fund account during the previous year 2021-2022 and subsequent previous years over the threshold limit; and
2. Interest accrued on the contribution stated above.

‘Non-taxable Contribution’ means a total of the following-

1. The closing balance of the Provident Fund account as of 31^st March 2021;
2. A contribution made by the person in the Provident Fund account, which is not included in the taxable contribution, during the previous year 2021-2022 and subsequent previous years; and
3. Interest accrued as per the above contribution.

‘Threshold limit’ means as under-

1. INR 5 Lakhs – when the contribution in the Provident Fund account doesn’t include the employer contribution.
2. INR 2.50 Lakhs – in any other case.

Other Exemptions on EPF Contributions

In addition to the standard exemptions for EPF contributions, there are certain specific circumstances under which the exemption of inco can still be claimed:

• Termination Due to Ill Health: If an employee is terminated from service due to ill health, they may be eligible to claim an exemption from EPF contributions. This income tax on PF exemption can be claimed even if the employee's illness is not related to their job.
• Causes Beyond the Employee's Control: If the employee's employment is terminated due to circumstances beyond their control, such as the discontinuation of the employer's business, they may be eligible for an exemption from EPF contributions.
• Transfer of EPF Balance to New Employer: If an employee gets employed elsewhere and their EPF balance is transferred to the new employer, they may still be eligible for an exemption from EPF contributions. However, the specific rules and conditions for this exemption may vary depending on the circumstances and the applicable laws.

TDS Treatment of EPF Contributions

When an employee withdraws an EPF amount exceeding ₹50,000 after working for less than five years, a 10% TDS (Tax Deducted at Source) is typically applicable. However, if the employee submits Form 15G or 15H along with their PAN, this TDS can be avoided. If the PAN is not provided, the TDS rate increases to 39%, the Maximum Marginal Rate.