Employee Provident Fund Organization (EPFO), one of many largest social safety organisations on this planet, is answerable for managing the welfare programme often known as Employee Provident Fund (EPF). Employees must be knowledgeable of the tax laws concerning investments, accruals, and EPF withdrawals.
Based on an interview with Preeti Sharma, Partner/Global Employer Services, Tax & Regulatory Services – BDO India, the spokesperson mentioned “Employee Provident Fund (EPF) is India’s hottest retirement monetary planning and funding selection for particular person taxpayers. EPF was earlier underneath the Exempt taxation framework, i.e., EPF was tax-free at:
Investment stage: When a contribution was made, one may declare a deduction underneath part 80C in opposition to the worker’s contribution upto INR 1.5 lakhs and all the employer’s contribution upto 12% of PF wage was exempt with none ceiling
Accrual stage: When curiosity is said on the amassed stability
Maturity stage: When the quantity is withdrawn from the fund topic to assembly exemption standards
The Indian Government with a view to promote the National Pension Scheme and tax High Net-worth Individuals has executed away with just a few of the above tax advantages by making the next adjustments in keeping with Preeti Sharma.
Tax rule on EPF contributions
Employee’s contribution to the EPF account is allowed as a deduction underneath Section 80C however throughout the total restrict of INR 1.5 lakhs. There is not any change on this provision.
Employer’s contribution to the EPF account of an worker is exempt upto 12% of the PF Salary. Effective 1 April 2020, any employer’s contribution to Provident Fund (PF), NPS and superannuation exceeding INR 7.5 lakhs per yr is taxable as perquisites within the palms of the worker underneath the pinnacle ‘Income from Salary’.
EPF tax rule on accrual of curiosity
Effective 1 April 2022, any curiosity on an worker’s contribution to EPF upto INR 2.5 lakhs per yr is tax-free and any curiosity earned on a contribution over and above INR 2.5 lakhs is taxable within the palms of the staff. The threshold of INR 2.5 lakhs is elevated to INR 5 lakhs in case the employer shouldn’t be contributing in direction of EPF.
As per the notification issued by the Income Tax division dated 31 August 2021, the Regional Provident Fund Commissioner (RPFC) will preserve the EPF stability of people in two separate accounts for taxation functions. The contribution throughout the restrict of INR 2.5lakhs/5lakhs in a single account and the surplus contribution together with the curiosity accrued on it shall be maintained in a separate taxable account. The RPFC shall deduct TDS on such curiosity paid on the account sustaining taxable contribution.
Further, along with the contribution made by the employer in extra of INR 7.5lakhs per yr that’s taxable as perquisites within the palms of workers, any curiosity, dividends, and so forth. earned from such extra contribution can be taxed as effectively within the palms of the worker.
Rule 3B has been launched by the Income Tax division to establish how curiosity, dividend, and so forth. can be calculated on the above contribution. Employers additionally have to withhold tax on such accruals.
Further, employers additionally want to supply the small print of such accruals and taxes withheld in Form 16 and Form 12BA issued to workers.
Tax rule on withdrawals of EPF
No tax is required to be paid on the contribution quantity and amassed curiosity in case the amassed stability in EPF is withdrawn after 5 years of steady service.
However, in case the amassed stability is withdrawn previous to the completion of 5 years of steady service (allowed by the RPFC in case of prescribed circumstances), then the stability and curiosity gained’t be absolutely exempted from tax. The tax on such withdrawal shall be calculated as follows:
a) Employer’s Contribution and Corresponding Interest
Employer’s contribution and curiosity on the identical is absolutely taxable within the palms of the worker underneath the pinnacle ‘Income from salary’ within the particular person’s Income Tax return.
b) Employee’s Contribution
In circumstances the place deduction underneath Section 80C is claimed on the time of contributing, the quantity of the worker’s contribution shall develop into taxable as ‘Income from Salary’. In different circumstances, the quantity withdrawn from an worker’s contribution is probably not taxable.
c) Interest on Employee’s Contribution
The quantity of curiosity earned on the worker’s contribution to EPF shall be taxable within the palms of the worker as ‘Income from Other Sources’.
The RPFC shall deduct TDS at 10% on the entire quantity withdrawn (if greater than INR 50,000) earlier than the completion of 5 years of steady service.
Impact and price range expectations
Despite the above adjustments, EPF nonetheless stays essentially the most liked and sought-after retirement planning scheme for almost all of particular person taxpayers. The above adjustments might not have an effect on people who’re incomes a primary wage upto INR 20 lakhs and contributing 12% of their primary wage in direction of EPF. Most people in India fall underneath this class.
While it’s anticipated that the above provisions on EPF taxation might not change within the 2023 Union Budget, there may be an expectation that the restrict of deduction accessible underneath Section 80C could also be elevated from the present restrict of INR 1.5 lakhs, mentioned Preeti Sharma.
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