Section 80C tax benefit on EPF
: When starting a new job, employees either join the Employees’ Provident Fund (EPF) for the first time or transfer their balance to the
EPF account
set up by their new employer. It’s important to understand your employer’s EPF setup, as this can affect your Section 80C
tax benefits
and other tax advantages related to EPF contributions.
Impact of EPF trust status on tax benefits
As per an ET report, contributions to an EPF account managed by the EPFO or an exempted trust are eligible for several tax benefits:
1. Section 80C deduction: Salaried individuals can claim a deduction on their EPF contributions.
2. Employer’s contribution: This is not taxed, subject to certain conditions.
3. Interest earned: The interest on both employer and employee contributions is tax-exempt, under specific conditions.
4. Maturity: EPF money is tax-exempt at the time of maturity.
Saraswathi Kasturirangan, Partner at Deloitte India, says that employees contributing to an exempted EPF trust get the same tax benefits as those with the EPFO. However, these tax benefits are not available for unexempted
EPF trusts
.
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Tax implications of unexempted EPF trusts
Saraswathi Kasturirangan explains that employees don’t get any Section 80C deductions for contributions to an unrecognized EPF trust. Additionally, the employer’s contributions to these trusts are taxed in the hands of the employees. Furthermore, the interest earned on both the employer’s and employee’s contributions is also taxable.
Sanket Jain, Partner at Pioneer Legal, agrees, adding that employee contributions to an unexempted EPF trust do not qualify for Section 80C tax deductions. Additionally, the interest earned on these contributions is taxable and is added to the employee’s income, taxed at their applicable
income tax
rate.
Contributions to an unexempted EPF trust include two parts: the employee’s contribution and the employer’s contribution. Interest is earned on both of these contributions.
Saraswathi explains the taxation of unexempted EPF trusts:
1. Employee’s Contribution: This is taxed as part of the gross salary, and no Section 80C deduction is available. However, at maturity or withdrawal, it is tax-exempt since it was already taxed at the time of contribution.
2. Interest on Employee’s Contribution: This interest is taxed as “income from other sources” at the time of withdrawal or maturity.
3. Employer’s Contribution: This is taxed as part of the employee’s salary at the time of withdrawal or maturity.
4. Interest on Employer’s Contribution: This interest is taxed as “profit in lieu of salary” at the time of withdrawal or maturity.
All these amounts are taxed according to the employee’s income tax slab rates.
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How employers manage EPF money
An employer can manage an
EPF scheme
either through the EPFO or as a self-managed trust.
When managed via the EPFO, the employer deposits both their contributions and the employees’ contributions into an EPF account held with the EPFO. Employees can access their EPF accounts through the Member e-Sewa portal.
When the EPF scheme is self-managed by the employer, the trust that manages the EPF money can be either “exempted” or “unexempted.”
Jain was quoted as saying, “An exempted trust is one which is recognised by both the EPFO and the Income Tax Department. These trusts are required to follow the specified EPFO rules to manage employees’ money. An
unexempted trust
is one which is not recognised by the EPFO or by the Income Tax Department. These trusts usually do not follow EPFO guidelines to manage the EPF money.”
