All About Changes in EPF Contribution Taxability

New Rules Related to Employee Provident Fund Scheme

EPF or Employee Provident Scheme is a tax saving scheme cum retirement benefit scheme, which can be availed by the employees of the organisation which are registered under the Employee Provident Fund Organisation (EPFO). Further, the organisations having more than 20 employees are required to obtain EPF Registration.

Amount of EPF contribution

Under the EPF Scheme, both employer and employee contribute to Employee Provident Fund on monthly basis in equal proportions of 12% of the basic salary and allowance. Out of the 12% from employer’s contribution, 8.33% goes to Employee Pension Scheme. This amount further carries a fixed rate of interest p.a. which is announced by EPFO during each financial year. The interest rate for the current Financial Year 2021-22.

Employee Provident Fund Scheme

New Rules of EPF

Earlier, the interest amount of annual contribution in EPF was not taxable but through the Union Budget of 2021, the interest earned on annual provident fund contribution beyond Rs. 2.5 lacs is now taxable. If the EPF and voluntary provident fund (VPF) annual contributions go beyond Rs 2.5 lacs, then the tax on interest will be same as the income tax rate (including surcharge, if any) applicable to the individual.

Also Read: Rules Related To EPF Withdrawal

Interest on EPF shall be exempted from tax till Rs. 5 lacs p.a., if there is no employer contribution.

New slab rates for annual contribution to EPF

Employees Provident Fund Contribution & their respective Return Rates

The first Rs 2.5 lakh contribution will earn 8.5% tax-free interest for next year as well assuming EPF interest rates do not change for the next year. If your EPF contributions increase to Rs 3 lakh then post-tax interest yield from EPF will be 8%.

Also Read: Major Exemptions & Deductions Availed By Taxpayers In India

Reason for change in EPF Contribution slab rate

– Over 1.23 lacs high net worth individuals are making use of EPF for tax-free income.
Higher contributor of EPF has Rs. 103 crore in his account, followed by two others over Rs. 86 crore.
– Top high net worth individuals have Rs. 825 crore in EPF Accounts & top 100 have over Rs. 2,000 crore.
With an average corpus of Rs. 5.92 crores, these high net worth individuals earned Rs. 50.3 lacs tax free interest annually.

Therefore, to bring high EPF amount earners under the tax purview, the EPF contribution taxability rates have been changed.

TaxHelpdesk Analysis

This move of bringing the EPF interest amount under the purview of taxation has been aimed at highly paid individuals and to discourage tax evasion. So, keeping in mind the slabs and taxation limits on EPF interests, the taxpayers are now advised to contribute their amount in EPF in such a manner that they do not need to pay any tax.

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