The Employee Provident Fund (EPF) is an investment and more beneficial scheme enacted by the Government in the common interest of employees. In this scheme, the employer and employee, both are required to contribute an amount which is calculated on the basic wages, dearness allowance and retaining allowance (if any).
The employer is required to contribute minimum 12% of basic wages, dearness allowance and retaining allowance (if any).
However, any amount contributed by the employer over and above 12% will be taxable in your hands as 'Income from Salary' .
The employee is also required to contribute matching amount of contribution of employer [i.e. minimum 12%]. However, you can contribute more than 12% which is also allowed as deduction u/s 80C from your gross total income.
Taxability on EPF withdrawal
The amount withdrawn from EPF is consists of principal [i.e. Contribution] and interest earned on it. There is difference of taxability on withdrawal on the basis of time of withdrawal.
There is generally two scenario of withdrawal:
Scenario A: Taxation when withdrawal is made before 5 years of continuous service
If you wish to withdraw before 5 years of continuous service, then tax liability would be as under:
Principal amount [i.e. Contribution]
Employer's Contribution is fully taxable.
Interest earned on Employer's Contribution is fully taxable as 'Income from Other Sources'.
Employee's Contribution is fully taxable if you have availed deduction u/s 80C in the year of investment. Otherwise, fully exempt from tax
Interest earned on Employee's Contribution is fully taxable as 'Income from Other Sources'.
However, the above rule will not be applied if the services has been terminated by reasons of :-
- Employee's ill-health
- Discontinuance of the Employer's business
- Causes beyond the control of the employee
Scenario B: Taxation when withdrawal is made after 5 years of continuous service
If you wish to withdraw the amount in your EPF account after 5 years of continuous service then the entire amount including the principal and interest withdrawn by you shall be tax- free. The interest earned with respect to your contribution and your employer' s contribution is exempt from tax.
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