The Employee Provident Fund (EPF) is an outstanding vehicle for salaried employees to generate retirement savings. At the time of contributions, interest received, and also the withdrawal of capital, income tax has a vital significance. At the time of settlement of the salary, the employer subtracts your EPF contribution i.e. 12 per cent from the basic salary. All employees with a minimum income of up to Rs 15,000 are obligatorily supported by the EPF. It is optional for those above this limit. If the basic salary surpasses Rs 15,000, the employer has the alternative of limiting the deduction on 12% of Rs 15,000/ rather than subtracting it from the basic salary as a whole. That being said, you can’t opt out of the same employer once you have preferred in.
You are allowed to claim the amount of PF deduction under Section 80C up to Rs 1.50 lakh per year for the EPF contribution deducted by your employer along with other qualifying expenses such as payment of life insurance premium, home loan reimbursement, National Saving Certificates, ELSS, children’s tuition fees, and so on. Under Section 80C, the deduction will be limited to the maximum of Rs 1.50 lakh, but an employee can make contributions more than the required minimum limit. In terms of the contribution rendered by the employer up to 12 per cent of the basic salary after which it becomes fully taxable to the employee, there is no tax liability for the individual. Similarly, in the event that the overall amount of the employer’s contribution to the employee’s EPF, Superannuation or NPS balance of the employee taken jointly surpasses Rs 7.50 lakh, the balance turns taxable to the employee.
Interest Earned On The EPF Account
As long as one is employed, the interest applied to the Provident Fund account is completely free from tax. The interest amount allocated to his or her EPF account appears taxable and is necessary to mention under the category ‘Income from other sources’, once the employee retires.
Taxation For Making Withdrawal From EPF Account
Unless you have withdrawn the balance from your EPF account where a deposit has not been made for a minimum duration of 5 years, the whole balance of the EPF account is completely tax-free in your possession. Keep in mind that in order to benefit from the EPF withdrawal exemption, it is not the period over which the account is owned, but the duration of months during which EPF deposits have been made which enables you to cherish tax deduction. In the event that the EPF amount becomes subject to taxation in your pocket leading to premature withdrawal, if the accumulated corpus payable to the employee is Rs 5000 or more, tax will be levied i.e. 10% on the total amount. However, the payer will subtract tax i.e. 30 per cent if you have a Permanent Account Number (PAN) or do not provide the same to the individual concerned for paying the amount.
Keep in mind that two separate and distinct aspects are the tax deduction and waiver of the tax liability. So if the slab rate pertinent to your income is higher than 10 per cent, you may have to incur more tax. Similarly, you may get the refund of the tax withheld on the EPF withdrawal if you do not have any tax liability or the tax liability on the net income including such withdrawal if less than 10% respectively. Though the term in which the accumulated withdrawal of the balance is taxed is regarded, if it is withdrawn within five years, the section reflecting the contribution of the employer together with the interest earned thereon shall become taxable under the heading ‘Salaries’.
Your contribution will, however, be taxable under the term “Income from other sources” along with interest particulars. Please remember that if you have not sought a deduction towards your contribution under Section 80C, you are not permitted to provide a portion of your contribution to the EPF tax account and are only required to bid interest on that amount for tax purpose.
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