PF becomes Taxable under these under conditions

The Employees Provident Fund is often resorted to as a retirement plan for most of the employees. The EEE benefits that it offers are: tax free contributions to the fund, tax free interest thereon and up on maturity when the entire amount is received, it is also exempt. Interestingly EEE benefits might not always give tax free returns. There are circumstances when the PF becomes taxable, how? 

The instances when PF or EPF becomes taxable are listed below:

Contribution to the PF account, the interest on it and the withdrawal from the PF account can become taxable.

1. Contribution to the EPF account– With effect from 1^st April 2020, the employer’s contribution to the EPF account is permitted to a maximum of Rs. 7.5 lakh in a financial year. This is inclusive of contributions made to National Pension System, Superannuation fund and EPF account on an aggregate basis. Cumulative contributions taken together, or the amount contributed to the EPF alone, if exceeds Rs. 7.5 lakh will become taxable. Any amount contributed by the employer above this limit shall be taxable as a perquisite in the hands of the employee. 
2. Interest on EPF becoming taxable-From April 1^st 2021 onwards if an employee contributes to the EPF account and simultaneously to the VPF where the total amount thus contributed exceeds Rs. 2.5 lakh in a financial year, the interest earned on the excess contribution shall be taxable in the hands of the employee. The interest earned on the excess contribution shall be taxed under the head income from other sources. 

In the case of government employees, where the employee’s own contribution is up to Rs. 5 lakh in a financial year and there is no contribution by the employer to the EPF account, then the interest will be tax free on the employee’s contribution. 

Again, the interest earned in excess of contribution (if any) of Rs. 5 lakhs shall be taxable as income from other sources. 

Also note that,

• When the money is left in an inactive EPF account, or it is not withdrawn after the employee leaves the job, interest earned on such inactive accounts shall be taxable in the hands of the employee. 
• In a case where the employer’s contribution is above the limit of Rs. 7.5 lakh for a particular financial year, difficulties are faced to calculate interest on it in absence of guidelines by the government. The manner of calculation is yet to be specified. 

3. Withdrawal from EPF can also become taxable: Withdrawals made because of financial emergencies like marriage etc are exempt from tax. 

But when the withdrawal is made from EPF account before working for 5 continuous years in a service, such withdrawal shall be taxable in the hands of the employee. Withdrawal after a working period of 5 years however is exempt from tax. 

Withdrawal of an amount more than Rs. 50,000 is also taxable even in a case where the employee has completed 5 years of service.  Additionally TDS at the rate of 10% shall be applicable if the withdrawal exceeds the limit of Rs. 50,000.

But if the employee leaves his/her job due some events which are out of the employee’s control, the 5-year limit shall cease to apply. Leaving the job say on account of ill health.     

Because of the Universal Account Number or UAN remaining the same for all the employers, even when jobs are switched by an employee during the first five years after joining the EPF, it shall be considered as eligible for the continuous five years’ rule.                                                                          

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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