EPF contribution is taxable for the employees
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EPF contribution is taxable for the employees

In this post, we will look into the new update regarding Employee’s Provident Fund (EPF) and Voluntary Provident Fund (VPF) as per the 2021 Finance Bill.

We will discuss the following topics in this post:

Introduction

As per the Finance Bill, from April 1, 2021, a new change is introduced regarding Employee’s Provident Fund (EPF) and Voluntary Provident Fund (VPF). There will be a tax interest on employee contributions to the provident fund (PF) above Rs.2.5 lakh per annum. It is thus altering the EPF advantages compared to the National Pension System (NPF).

Employee’s Provident Fund (EPF) until now enjoyed an EEE (exempt-exempt-exempt) status while National Pension System has exempt-exempt-taxable status.

Employee’s Provident Fund (EPF) contributions are now tax-deductible up to Rs 1.5 lakh per annum under Section 80C. However, interest earned on EPF, VPF, and exempted PF trusts are exempted from tax up to Rs 2.5 lakh.

Purpose

This new addition from April 1, 2021, will act as a hindrance for some individuals, especially for individuals, who have been contributing higher amounts to their PF to earn a higher interest.

Difference between EPF and NPS

Now let’s see some key differences between the Employees’ Provident Fund (EPF) and National Pension System (NPS).

Contribution Returns Withdrawal Taxability Tax deduction on contribution
Employees’ Provident Fund (EPF) It is mandatory and for employees in organised sector it is restricted to 12% of Basic salary and DA EPFO has a fixed EPF interest rate The full amount can be withdrawn if you are 58 years old or after 2 months of unemployment. It is under Exempt-Exempt-Exempt (EEE). In budget 2021 interest on contribution above 2.5L per annum will be taxed from the employee. Up to 1.5L per annum (under Section 80 C)
National Pension System (NPS) Usually voluntary, but compulsory for some government employees Its equity components deliver higher returns than EPF. But it’s market-linked and there is a risk factor. 60% of the total amount can be withdrawn after 60 years of age. Rest 40% can be used to buy an annuity or pension product. 60% of the full amount can be withdrawn, and it’s tax-free. Annuity brought with the rest of 40% is taxable. Up to 1.5L per annum (under Section 80 C)

Note:

Exempt-Exempt-Exempt (EEE) is where a product gets tax benefit at the time of investment, collecting interest, and withdrawal.

Voluntary Provident Fund (VPF) is like EPF where employers do not contribute to it, but employees can voluntarily contribute to it. However, it has the same interest as EPF but no tax-exempt under Section 80C like EPF contributions. Some employers use exempted PF trusts for their employees. These act as a proxy for EPF and earn the same interest and have the same tax status.

Are there better investment options?

Now an employee with high salary earnings has to adopt a mix of Employees’ Provident Fund (EPF) and National Pension System (NPS) to maximize returns and minimize tax. Returns on NPS are tax-exempt until withdrawals are after maturity. At this point, 60% of the total amount is tax-free while 40% used to buy an annuity is taxable. While the EEE tax structure may be more favourable than the EPF interest on contributions above Rs 2.5 lakh.

What you can do as an HR?

  1. Send this information to your employees – Looking for a format, download it from us.
  2. Some employees might be contributing VPF, reach out to them and see if they want to reduce or move their contribution to somewhere else.
  3. If they do change, you will have to update that in your salary management software.
  4. Make sure it is updated in the payslip when you generate it.

Disclaimer

This is just the proposal and not yet confirmed. The slab or percentage of tax is not yet announced. We will update it as soon as it is available. Keep an eye out on this blog to get the update.

With that, we have come to the end of this post. Share your queries and views with us in the comment section below

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