Employee Provident Fund and Taxation – A Guide

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If you have ever paid attention to your salary slip, the acronym EPF won’t be new for you. It stands for Employee Provident Fund, a scheme managed by the Employees’ Provident Fund Organization wherein an employee pays a certain contribution towards the scheme and an equal contribution is paid by the employer. Post-retirement, the employee gets a lump sum amount including self and employer’s contribution along with interest.

Employee Provident Fund

Initially set up with an intention to secure the retirement of private sector employees, it spread out and is now applicable to every establishment in which 20 or more persons are employed and certain organizations are covered, subject to certain conditions and exemptions even if they employ less than 20 individuals.

Recognized Provident Fund (RPF): Applicable to an organization with 20 or more employees, however an organization with fewer employees can also voluntarily opt for this scheme. All RPF schemes must be approved by the Commissioner of Income Tax (‘CIT’) and trust so created shall invest funds in a specified manner, the income of such trust shall be exempt from direct tax in India.

Unrecognized Provident Fund (URPF): These are schemes started by the employer and employees in an establishment, but not approved by CIT. Since they are not recognized, URPF schemes have different tax treatment as compared to RPFs.

Statutory Provident Fund (SPF): Registered under Provident Fund Act, 1925 this fund caters mainly to Government/University/Educational Institutes (affiliated to university established under statute) employees.

Public Provident Fund (PPF): A scheme under Public Provident Fund Act 1968 under which even self-employed persons can contribute. The minimum contribution being INR 500 per annum to maximum going up to INR 150,000 per annum. The contribution made along with interest earned is repayable after 15 years unless extended.

Trigger of Employee Provident Fund taxability

Employee Provident Fund taxability can be segregated into three segments

  • Tax at the time of Investment

Any amount contributed by the employer is tax-free if it is within the specified limit of 12%, however, the amount contributed over and above 12% is taxable in the hands of the employee as ‘Income from Salary’’. Similarly, employee’s contribution towards PF can be claimed as a deduction under Section 80C.

  • Tax on interest earned

The interest earned over and above 9.5% is taxable as ‘Income from other sources’.

  • Tax at the time of withdrawal

The withdrawal amount of an account consists of the investment/principal portion and the interest earned on it. However, the taxability differs based on the time of withdrawal:

Withdrawal
Employee’s
Contribution

Employer’s
Contribution

Interest
Amount
After 5 years of continuous service* Exempt   Exempt Exempt
Before 5 years of continuous service*   Deduction u/s 80C availed at the time of Investment – Taxable as ‘Income from Salary’.

Deduction u/s 80C not availed at the time of investment- Not Taxable
Taxable as ‘Income from Salary’   Taxable as ‘Income from other sources’  

*The five years of service can be completed either with one or more than one employer

Without prejudice to the above, withdrawal made before 5 years is not taxable in the following cases:

  1. If the service is terminated due to an employee’s ill health;
  2. Due to discontinuance of the employer’s business;
  3. Or any other reason beyond the control of the employee.”

As per direct tax notifications and circulars, EPFO has amended rules to allow withdrawal up to 75% of the accumulated EPF corpus after one month of quitting a job. The subscriber can withdraw the remaining 25% after two months of unemployment. TDS @10% is levied on withdrawal before five years of continuous service. In fact, no TDS is deduced if amount is less than INR 50,000 or employer is closing down the business. A subscriber can submit Form 15G/15H to avoid TDS in case income for the year is below the taxable limit.

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About Deepti Verma 205 Articles
Deepti Verma is a Political/Social Writer and Researcher based in Navi Mumbai. A lightworker, she is often seen spreading the light via Law of Attraction, Positive Affirmations and other Manifestation as well as self-healing techniques. Follow @universal_rover