All you need to know about Employee Provident Fund (EPF) in 2023
New Taxability rule of Employee Provident Fund (EPF) in 2023
he Employee Provident Fund (EPF) is a retirement savings scheme for employees in India. It is a statutory requirement for all establishments with more than 20 employees to provide EPF coverage to their workers. The main objective of the EPF is to provide financial security to employees during their retirement years.
Here are some key details about the EPF:
- Contribution: Both the employee and the employer contribute a fixed percentage of the employee’s salary towards the EPF account each month. Currently, the contribution rate is set at 12% of the employee’s basic salary and dearness allowances, with 8.33% going towards the EPF account and the remaining 3.67% towards the Employee Pension Scheme (EPS).
- Withdrawal: EPF accumulations can be withdrawn after the employee has completed 58 years of age or upon retirement, whichever is earlier. Withdrawals are also allowed in cases of unemployment, serious illness, or for the purchase of a house.
- Interest: The EPF accumulations earn interest on a yearly basis. The interest rate is set by the government and is reviewed annually.
- Transfer: EPF accumulations can be transferred from one EPF account to another when an employee changes jobs. This ensures that the employee’s savings are not lost and continue to grow.
- Online access: Employees can view their EPF account details and balances online through the EPFO portal, and they can also download their EPF passbook.
In conclusion, the EPF is a valuable savings scheme for employees in India, providing them with financial security during their retirement years. By contributing regularly to their EPF account, employees can ensure that they have a comfortable retirement.
What are the taxation rules for income from EPF contributions?
Tax on interest credited to EPF account
After Budget 2021, interest on an employee’s contribution to an EPF account above Rs 2.5 lakh during the financial year is taxable in the hands of the employee. This interest is also subject to TDS.
This rule will only apply to the contributions made by the employee, while contributions made by the employer will not be taxed. The calculation of interest on the threshold limit of Rs 2.5 lakh shall also include VPF contributions.
For example, an employee’s basic salary (no dearness allowance) is Rs 50,000 per month, and the employer is registered under the EPF scheme. So, the employer deducts 12% of the employee’s basic salary, i.e., Rs 6,000 for EPF contribution. However, the employee voluntarily contributes Rs 3.28 lakh in VPF during the financial year. Hence, the employee’s total EPF contribution during the financial year will be Rs 4 lakh (Rs 6,000 x 12 + Rs 3.28 lakh).
The employee will be required to pay tax on the excess contribution of Rs 1.5 lakh (Rs 72,000(EPF) + Rs 3.28 lakh(VPF) – Rs 2.5 lakh)).
In the case of govt employees who contribute to GPF, the threshold of Rs 2.5 lakh has been raised to Rs 5 lakh. Interest on contribution in excess of Rs 5 lakh shall be taxable for the employee.
Before FY 2021-22, the interest credited to the EPF account on any amount of contribution was tax-free. Now a cap of Rs 2.5 lakh has been introduced, interest on contributions beyond this shall be taxable.
Tax deduction on contribution to EPF account
An employee’s contribution to the EPF account is allowed as a deduction up to Rs 1.5 lakh under Section 80C of the IT Act.
From FY 2020-21 onwards, the employer’s contribution to the EPF account shall become taxable if the contribution to EPF, NPS and/or superannuation fund exceeds Rs 7.5 lakh in a financial year. The excess contribution will become taxable. The employer needs to calculate the amount that will be taxed as a prerequisite, and this will be reflected in the employee’s Form 16.
Effective date
This amendment will be applicable from 1st April 2021. It means the interest on the employee’s EPF contributions for the FY 2021-22, and above Rs 2.5 lakh shall be taxable.
How to calculate the taxable portion of EPF interest?
As per notification No. 95/2021 dated 31st August 2021, for calculating taxable interest, the PF department shall maintain separate accounts, one with taxable contribution and another with non-taxable contribution, for all the subscribers starting from the financial year 2021-22 and onwards.
The taxpayer shall be liable to pay tax on the interest accrued in the taxable contribution account. The EPFO shall deduct TDS on such interest.
Under what circumstances will TDS on interest be deducted?
TDS will be deducted at 10% on taxable interest income accrued above the threshold limit during the year as per Section 194A of the IT Act.
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