Tax on employee provident fund or EPF contributions

Employee Provident Fund (EPF) is a welfare scheme framed under the Employee’s Provident Funds and Miscellaneous Provisions Act,1952.

As per the provisions of this act, any person who employs 20 or more employees has to compulsorily get registered and start a provident fund scheme for the benefit of it’s employee after 3 years of establishment. However, voluntarily if both employee and employer wants to start contributing to EPF scheme then they can do so even if above criteria doesn’t match.

Instead of joining government’s employee provident fund scheme, the employer can start a PF scheme by creating a trust in their own organisation after getting approvals from the commissioner of provident fund and income tax.

If the provident fund has been created by the employer creating a trust and it has been and continues to be recognised by the EPF act 1925, then all the benefits applicable to government’s EPF scheme is also applicable to it.

Under EPF scheme, certain sum is deducted every month by the employer from employee’s salary. In addition to it, employer also contributes a certain percentage of the employee’s salary to the EPF account. Both contributions are deposited and invested for the benefits of employee.

In addition to these contributions, interest earned on investments is also added to the EPF account of employee. In this way balance keep accumulating year after year to give a lump sum amount at the time of retirement, resignation or termination of the employee.

In this article, we will be discussing tax treatment of employee provident fund or EPF at the time of investing and thereafter.

Employee’s contribution to EPF

Employer has to deduct employee contribution to EPF from his/her salary. It means, this particular amount is already part of the taxable salary. Therefore, you should not include this amount again into gross salary.

For the employee’s contribution, tax deduction is available under section 80C of income tax act,1961 from gross total income up to the maximum limit specified. For the financial year 2018-19 and 2019-20, maximum limit specified for section 80C is Rs 1,50,000.

Employer’s contribution to Employee Provident Fund

Contribution to EPF by the employer is over and above the salary of the employee as it’s never included. Here, we are talking about employer contribution to EPF as it’s mandatory for them to contribute to EPF account.

However, employer’s contribution to employee’s EPF account is exempted up to 12% of salary. Amount contributed in excess of 12% of salary is to be included in gross salary as it’s not exempted.

Please note, assessee or employee is not eligible to get deduction under section 80C for the employer’s contribution to Employee Provident Fund scheme.

Salary for this purpose includes basic, dearness allowance if the terms of employment so provide and commission as a fixed percentage of the turnover.

Interest on employee provident fund

Interest credited to EPF account for the amount contributed by both employer and employee is also an income over and above the salary.

However, interest credited to Employee Provident Fund account is exempted up to 9.5% per annum under section 10. Any amount of interest credited in excess of 9.5% per annum is included in employee’s gross salary.

Amount received from EPF on retirement, resignation or termination of employee

The accumulated balance in employee provident fund shall be exempted under section 10(12) of Income tax act,1961 if following conditions are satisfied:

  • Employee has rendered continuous service of 5 years or more with employer;
  • Employee has been terminated from service by reason of ill-health or contraction/discontinuance of the employer’s business or for any other reason beyond the control of the employee/assessee.

While calculating period of continuous service of 5 years, the period of service under the former employer shall also be included if the accumulated balance due and payable has been transferred to the present employer’s recognised provident fund account.

TDS while withdrawing accumulated balance from EPF

Government while paying the accumulated balance in EPF to the employee, deduct tax at source under section 192A at the rate of 10% as per the terms and conditions of income tax act.

As per the tax provisions, TDS at the rate of 10% has to be deducted only when;

  • amount withdrawn is more than Rs 50,000, and
  • assessee has submitted permanent account number or PAN, and
  • form 15G or 15H has not been submitted, and
  • amount withdrawn is not exempted.

To know more, you can read our earlier article written on TDS on EPF withdrawals under section 192A.

If the amount withdrawn is less than equal to Rs 50,000 then TDS amount not to be deducted.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.