Employee Provident Fund (EPF) is one of the most commonly used retirement cum investment scheme enacted by the Government for employees. The employer and employee, both are required to contribute an amount under this scheme at some percentage of Basic Wages, Dearness Allowance and Retaining Allowance (if any) as follow:
The employee is required to contribute a minimum 12% of basic wages, dearness allowance and retaining allowance (if any). However, the employee can contribute more than 12% (by giving written Request/consent to the employer) which is also allowed as deduction u/s 80C from your gross total income.
The employer is also required to contribute the matching amount of contribution of employee [i.e. 12%]. The employer is not bound in any case to contribute more than 12%, even if an employee contributing more than 12%. However, if Employer suo-moto contribute any amount over and above 12% then it will be taxable in employee’s hands as ‘Income from Salary’
Taxability on EPF withdrawal
The amount withdrawn from EPF consists of principal (i.e. Contribution made by Employee and Employer) and interest earned on Contribution made by Employee and Employer.
Taxability on EPF withdrawal depends on the time of withdrawal of EPF.
Usually, there are two scenarios as follow:
Scenario I: Taxation when withdrawal is made before 5 years of continuous service
If you wish to withdraw EPF 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 II: 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
- Principal (i.e. Contribution made by Employee and Employer) and
- Interest earned on Contribution made by Employee and Employer.
shall be tax- free.
Disclaimer: Due care has been taken to draft this write-up and is intended to express the Authors understanding and to start an academic discussion on the subject discussed in above write-up. it should not be considered as professional advice. Readers are advised to refer to relevant provisions of law before applying any of the above-mentioned views. The author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the content of this write-up.