Government to Tax EPF

Having an Employees’ Provident Fund (EPF) can help you save for life after retirement. Moreover, the government has ensured an 8.25% interest rate on your contribution (12% of your income) towards EPF, which can significantly bolster your savings. However, from April 2022, a government mandate requires you to pay taxes if the principal you are drawing interest on exceeds Rs. 2.5 lakhs. The threshold is considered to be Rs. 5 lakhs if your employer is not contributing towards your PF. Furthermore, if your employer’s contribution towards your EPF exceeds Rs. 7,50,000, the tax liabilities fall with the employee. Despite the new regulations, however, it is always beneficial to have an EPF to have savings for post-retirement life.

• You can earn an annual interest of 8.25% on your capital accumulated in your EPF account.
• You can earn profits by investing a part of your EPF and simultaneously save on taxes.
• EPF helps you save on your taxes under Section 80C of the Income Tax Act.

Also Read: What is Provident Fund (PF)?

Let us now look at the eligibility criteria for you to have an EPF account:

1. Your basic salary and DA (dearness allowance) must be up to Rs. 15,000 per month. You can still join EPF if you earn more by opting in within 6 months of joining.
2. If your organisation has 20 or more employees, it must extend its EPF benefits to them.

After you have been enlisted in the company EPF, you will be eligible for all the employee benefits, including pension. Thus, you will have a steady source of income even when you retire.

The newest aspect of the EPF is that whatever investments you make through the online account is meant to be tax-free. However, you will continue to pay taxes on the interest accrued on the principal amount according to the stipulated tax slab fixed by EPF India. Nevertheless, the principal amount will keep increasing with the fixed interest of 8.25% until you remain active on the account, i.e. till your retirement age.

Notably, the share towards the pension scheme under the EPF does not accumulate interest, and you will receive this amount after your retirement.

Let us now calculate the EPF components, assuming that your salary per month is Rs. 30,000.

Since the percentage of your contribution is 12%, your monthly contribution towards your EPF will stand at 12% of Rs. 30,000, i.e. Rs. 3,600.

Thereafter, if your employer contributes 8.5% towards your pension scheme and 3.67% towards your EPF, their contribution towards your EPF will be 3.67% of Rs. 30,000 = Rs. 1101, and towards your pension scheme will be 8.5% of Rs. 30,000 = Rs. 2,550. Therefore, the total contribution of your employer towards you is Rs. (1101 + 3600) = Rs. 4,701.

So, the interest accumulated on your salary will be (8.5/12) % of Rs. 4,701, i.e. Rs. 33.29.

There are several benefits of registering under EPF. Let us take a look at them one by one.

• The first benefit is obviously capital accumulation. You would have a steady reservoir of resources that you can bank on after you retire.
• You can invest a part of your accumulated capital, which will serve two purposes. First, it will help you save on taxes on the amount (if your principal amount has crossed Rs. 2.5 lakhs), which is a significant amount of money. Second, you will earn profits from these investments and increase your capital. Although you have to pay taxes on them later on, the amount will not be disproportionate because you will register your net profit which will account for the losses that you may have incurred.
• You can withdraw from your EPF partially if you have to cater to an emergency. Therefore, you can also view your EPF as an emergency fund!

Also Read: Check EPF Balance Amount

There are certain sections of the Income Tax Act that you should make ample use of to minimise taxes:

• Investments in the Employees’ Provident Fund are tax-deductible up to Rs. 1.5 lakh per year u/s 80C.
• If you withdraw from EPF within five years of creating the account, the withdrawals are tax-free. However, Tax Deducted at Source (TDS) is deducted from this amount if it is greater than Rs. 50,000 within five years of opening the account.

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