The Employee Provident Fund (EPF) program was established to provide employees with significant benefits upon retirement. According to the plan, the employee’s salary will have a certain amount removed as part of his contributions to the fund. The employer also contributes the same amount. According to the rules, an employee who hasn’t worked for the firm consistently for five years or more and withdraws money from a PF account is taxed.
In the individual’s hands, it will be taxed as if the fund had not been recognized from the beginning of the contributions. This article discusses the various types of provident funds (recognized and unrecognized), a general overview of EPF or Recognized Provident Fund, when withdrawals are tax-exempt, tax on withdrawals made before five years, tax deducted from the withdrawal amount, and relief under Section 89.
How to Withdraw or Transfer Employee Provident Fund has been covered in our articles Basics of Employee Provident Fund: EPF, EPS, EDLIS, and Withdrawal or Transfer of Employee Provident Fund.
Type of Provident Funds?
The Employee Provident Fund amount is taxable in the hands of the individual when it is withdrawn prior to five years of continuous work since the fund is viewed as an unrecognized fund from the outset. Let’s examine the many types of provident funds. A retirement benefits program called Provident Fund offers the following categories of benefits:
Statutory Provident Fund: The Provident Fund established under the Provident Fund Act of 1925 is referred to as Statutory Provident Fund. Local governments, railroads, universities, and other accredited educational institutions, together with government and semi-government organizations, manage this fund.
RPF, or Recognized Provident Fund, A recognized provident fund is one to which the Employee’s Provident Fund and Miscellaneous Provisions Act of 1952 applies. An organization with 20 or more employees may use this form of provident fund (organizations with less than 20 employees can also join). The Commissioner of Income Tax recognizes a recognized provident fund. This kind of recognized provident fund can be started jointly by an employer and a group of employees by creating trust.
Section 80-C states that up to 12% of pay is free from taxation. 9.5% interest is applied to the paycheck. If an employee leaves their position after five years of service has been completed or because of a terminal disease, nothing is taxed. The employee is not taxed if the business is shut down. An Employee Provident Fund is typically used to refer to a Recognised Provident Fund.
The Unrecognized Provident Fund (URPF) The commissioner of income tax does not recognize this category of provident fund. There won’t be a section 80-C deduction available. Contributions are not taxed in any way. The employer’s contribution, in this instance, is taxed as pay income. Contributions made by employees are not taxed.
The Public Provident Fund (PPF). It was created with the general public’s welfare in mind. Any member of the public may participate, whether they are a paid employee or a self-employed individual. It is one of the best tax-saving schemes in India
Tax on EPF withdrawal
|Statutory provident fund||Recognized provident fund||Unrecognized provident fund||Public Provident Fund|
|Employer’s contribution to provident fund||Not taxable||Not taxable up to 12 per cent*of salary||Not taxable||The employer does not contribute|
|Deduction under sec 80C||Available||Available||Not available||Available|
|Interest credited||Fully exempt||Exempt if the rate of interest does not exceed the notified rate of interest i.e 9.5%||Exempt from tax||Exempt from tax|
|Lump sum payment received at the time of retirement or termination of service or withdrawn||Exempt u/s. 10(11)||Exempt from tax u/s. 10(12) Subject to conditions: not taxable if the employee retires after 5 years of service or due to the inability of work. Otherwise treated as URPF||Employee’s Contribution|
exempt from tax. Interest thereon is taxable under the head of income from other sources. Employer’ s contribution
and interest thereon is
taxable as Profits in lieu
of Salary, under” Salaries”)
|Exempt from tax u/s 10(11)|
Recognized Provident Fund
Employees earning up to Rs 15,000 in basic pay must make a mandatory contribution to the Provident Fund, while those earning more than Rs 6501/-have the choice of joining. The employer matches the employee’s contribution up to a maximum of 12 percent, providing additional funds. The donation is distributed among
1. Employees’ Provident Fund Scheme, (EPS)1952
2. Employees’ Deposit Linked Insurance Scheme (EDILS), founded in 1976
3. Employees’ Family Pension Scheme, 1971, was substituted by the Employees’ Pension Scheme, 1995.
Employer contribution to PF: The employer is required to provide a payment to the pension plan, which is limited to 8.33 percent of Rs. 6,500 per year, or Rs. 541 each month. After October 2015, the price is Rs 15,000 annually or Rs 1250 per month. According to income tax legislation, if the employer contributes up to 12% of the salary to the EPF, the amount is tax-free.
Contribution to the PF made by the employee: Under Section 80C of the Income-tax Act, 1961, an employee may deduct his contribution to the EPF from his taxable income up to a maximum of Rs. 1,00,000 per year or Rs. 1,50,000 (after FY 2013–14).
Interest on PF Contribution: Both the employee and his employer receive interest on the PF sum that is contributed. Every year, the PF accounting period runs from March through February. Every year in April, the government credits the interest that has accrued on the PF balance. Such interest is not subject to taxation.
|Scheme||Employee’s contribution of basic pay||Employer’s contribution|
It should be noted that the employee’s contribution must match the employer’s contribution in order to be valid. However, the employee has the option to contribute more than 12%, known as the Voluntary Provident Fund (VPF), provided that the employer is not required to make additional contributions above those that are required by the PF Act.
Let’s imagine that a worker receives a base wage of Rs. 20,000 at the beginning. He receives a 5% increase usually every year. His employer matches 12% of his basic income, which he pays to the PF; the EPF contribution is 3.67%, and the EPS contribution is 8.33%. 8.5% is the EPF Interest. Using the EPF Calculator, Method I, divide Employer,
|Years||Opening Balance||Monthly basic (Rs.)||Employee PF (Rs.)||Employer PF (Rs.)||Interest on Employee Part||Interest on Employer Part||Total EPF amount (Rs.)|
Withdrawal from EPF exempt from Tax on EPF withdrawal:
- The conditions under which an employee’s withdrawal is free from tax are laid out in Rule 8 of Part A of the Fourth Schedule of the Internal Revenue Code. Payment from a recognized provident fund is tax-free if the employee satisfies any of the following criteria: When a member of the PF scheme retires from duty after turning 58, he is entitled to withdraw the PF amount to which he is entitled. if the worker has worked continuously for the employer(s) for at least five years. When calculating the five-year period, the years of continuous service provided to the prior employer(s) will be taken into consideration if the balance includes money transferred from the person’s PF account that was kept by their previous employer(s).
- The sum will be tax-exempt if the employee has not completed five years of continuous employment but the service is terminated due to the employee’s illness, the employer’s business ceasing operations, or other factors beyond the employee’s control. When an employee leaves a job and immediately finds another, the accrued PF balance is transferred to the new employer’s individual PF account, which is not subject to taxation.
- EPF taxability if withdrawn before five years The PF amount is taxable in the hands of the individual when it is withdrawn prior to five years of continuous work since the fund was not recognized at the outset of the contributions. The Provident Fund would be handled from the start as an Unrecognised Fund. The employer’s contribution and interest earned thereon would be completely taxable in the hands of the individual as profits in place of pay or “salary income.”
- If any deductions were claimed under Section 80C of the Income-tax Act of 1961, the employee’s contribution would be taxed up to the amount of such deductions. In the hands of the employee, the interest gained on the sum of contributions would be taxed as “income from other sources.”
To recap, The various heads of income for income tax purposes are :
- Income from house property
- Profits and gains from business or profession
- Capital gains
- Income from other sources
The different contributions in the example above will be as follows:
- Employer’s contribution plus interest will be included under Salary income as (8,808 + Interest on 8,808 for 3 years) + (9,248 + Interest on 9,248 for 2 years) + (10,196 + Interest on 10,196 for 1 year).
- The employee’s contribution, which is 28,800 + 30,240 + 31,752 (assuming he claimed the whole amount in 80C), will be taxed.
- Interest received as “revenue from other sources” on his donation (interest on 28,800 for three years, interest on 30,240 for two years, and interest on 31,752 for one year).
However, no tax liability will result from the transfer of the cumulative PF account balance to a recognized PF account kept by the new employer. If there was no contribution to an individual account and no withdrawals or transfers from the PF, you would get interest, but this interest would be taxed.
Dormant accounts are what such EPF accounts are known as. But during the 36 months that they were inactive, dormant accounts will continue to collect the income. Prior to this modification (April 2011), interest was put into accounts whether or not there were donations being received.
Tax Deducted at Source (TDS) for EPF Withdrawal
The Income Tax Department has instructed EPFO (Employees Provident Fund Organisation) to deduct Tax (TDS) from the withdrawal amount if the withdrawal happened before completing five years of subscription
Before Jun 1, 2015,
If the withdrawal occurred before the subscription period of five years had expired, the Income Tax Department has advised EPFO (Employees Provident Fund Organization) to deduct Tax (TDS) from the withdrawal sum. Before June 1, 2015, TDS is deducted at the rate of your income bracket, with a minimum of 10% (if you earn more than 10 lakh), and a maximum of 30%.
Your employer will provide you with form 16/16A for this deduction, which you must present when submitting your income tax return. (I’m unsure of the TDS rates; if you know, kindly let us know in the comments area.) You may be eligible for a refund if your income in the year that the EPF is withdrawn is lower than the taxable limit (for instance, if you are a student or have not yet found employment).
After Jun 1, 2015
- If a PAN is given, income tax will be withheld at source (TDS) at a rate of 10%. If the accrued PF balance at the time of payment is greater than or equivalent to Rs. 50,000 30,000 with service shorter than 5 years, TDS would be deducted. The limit was raised on June 1 20016 from 30,000 to 50,000. However, if the member submits Form 15G or 15H, no TDS will be taken out. These documents are used to state that after receiving payment of their PF accumulations from EPFO, their income won’t be subject to taxation. Form 15G is filed by applicants under the age of 60, and Form 15H is submitted by seniors (those above 60).
- If a member fails to submit a PAN or Form 15G or 15H, TDS will be withheld at the highest marginal rate of 34.608 percent. When transferring PF from one account to another, TDS is not to be taken into consideration. Additionally, it won’t be subject to TDS if the employee’s employment is terminated owing to the employer’s termination or contraction of operations as well as the member’s poor health. If an employee withdraws PF after five years of continuous employment, including time with a previous employer, EPFO will likewise not withhold TDS. When a member receives a payout of less than Rs 50,000 but has fewer than 5 years of service, the body will also not collect TDS.
- Relief section 89 of the Indian Income Tax Act of 1962 One’s tax obligation for that year increases when pay or other income is received in arrears. only because one’s annual total income has grown. However, it is unjust to the taxpayer to have to pay more in taxes as a result of arrears. The additional tax would not have converged in one year as a lump sum payment if he had first gotten the money in the year or years that he was expected to receive it.
- An employee may seek relief under Section 89(1) of the Income Tax Act if he receives his pay in advance, arrears (receives money from an earlier year or years), or in lieu of compensation in the form of profits (ex gratuity, commuted pension). When an employee receives compensation under the voluntary retirement plan (VRS) and does not claim a deduction under section 10(10C) of the income tax, this is referred to as receiving salary in advance. According to section 17(3) of the Income Tax Act, income will be computed at a higher rate in this circumstance.
Relief calculation under Section 89
Step 1: Determine the tax due for the current year on all income, including wages received in arrears, in advance, or as compensation (including CEEs and education cess).
Step 2: Determine the current year’s tax on income, excluding wages in arrears, in advance, or compensation (including CEEs and education cess).
Step 3: Steps 1 and 2
Step 4: Calculate tax on income, including salary in arrears/advance/compensations, for the year that the salary/compensation was supposed to have been paid (including cees and education cess).
Step 5: Calculate tax on income, excluding salary in arrears, advance, or compensation, for the year in which the salary or compensation should have been paid (including CEES and education cess).
Step 6: Steps 4 and 5.
Step 7: Relief u/s 89 = Steps 3 through 6 (if positive, otherwise nil)
Step8: Current Assessment Year Tax Paid = Steps 1 through 7
Illustration: Mr. Mehta is employed with ABC Ltd. His taxable income for the financial year 2011–12 is Rs. 12,00,000. On December 1st, 2011, he received Rs 60,000 in bonus arrears dating back to the 2007–2008 fiscal year. He had taxable income for the 2007–2008 fiscal year of Rs 2,30,000, and he had paid Rs 20,600 in taxes. 60,000 will be subject to tax in 2011–2012. He is eligible for relief under section 89, as indicated below. Fiscal Years 2007–2008 tax rates: From 1,10,000 to 1,50,000: 10%; from 1,50,000 to 2,50,000: 20%; and from 2,50,000 and up: 30%; Education Cess: 3%
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