As we all Know that off-late the Taxability provisions regarding Employee Provident Fund have become complex. Further, complexities also lies in the fact the legal provisions related to Taxability of EPF has been provided at multiple places in the Income tax Act. Therefore, for the benefit of readers we have analysed and summarised the complete provisions related to Taxability of Employee Provident Fund (EPF) in a very simplified manner with the help of Charts and Illustrations.
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Article is Divided in following sections:
Taxability at the Time of Contribution (Employer & Employee)
Employer Contribution
Employer Contribution up to 12% of Salary (Basic plus DA) is exempt from Income Tax. Any Contribution above 12% of Salary would be taxable in the hands of Employee as Salary. (Clause 6 of Part A of the Fourth Schedule).
However, above Exemption is subject to the condition that total contribution by the Employer in following schemes in a Year does not exceeds Rs. 7.50 Lakhs
(a) in a recognised provident fund;
 (b) in the scheme referred to in sub-section (1) of section 80CCD (i.e. NPS); and
 (c) in an approved superannuation fund,
In case, contribution is above Rs. 7.50 Lakhs, amount over and above Rs. 7.50 Lakhs would be taxable in the hands of Employee as Perquisite. (made effective from 01.04.2020 vide Section 17(2)(vii).
Employee Contribution
An Employee can avail deduction under Section 80C up to Rs.1.50 Lakhs in Old Tax Regime.
Taxability at the Time of Accrual i.e. Interest Income on Contribution (Employer & Employee)
Employer Contribution
In case interest rate credited to the Provident Fund is up to 9.5%, it is not taxable. (Clause 6 of Part A of the Fourth Schedule).
However, in case total contribution by the Employer is more than Rs.7.50 Lakhs, interest, dividend etc. on such excess amount would be taxable in the hand of Employee as Perquisite in terms of Section 17(2)(viia). The calculation methodology for such taxable portion has been provided in Rule 3B.
For complete details about Calculation Methodology with the help of illustrations as per Rule 3B, please read at:
Employee Contribution
In case interest rate credited to the Provident Fund is up to 9.5%, it is not taxable. (Clause 6 of Part A of the Fourth Schedule).
However, in case total contribution by the Employee is more than Rs.2.50 Lakhs in a Financial Year, Interest on such excess amount would be taxable in the hand of Employee in terms of Section 10(11) & 10(12). The calculation methodology for such taxable portion has been provided in Rule 9D.
For complete details about Calculation Methodology with the help of illustrations as per Rule 9D, please read at:
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Taxability at the Time of Withdrawal
Taxability at the time of Withdrawal can be understood with the help of following Chart
Note: Here Continuous Service also includes service with previous Employers where Previous Employers were covered in EPF and Employee has transferred balance from Previous Employer to the Current Employer.
In Case it is Taxable, how it will be Taxed (As defined in Clause-9 of Part A of Fourth Schedule)
Where the accumulated balance due to an employee participating in a recognised provident fund becomes Taxable, the Assessing Officer shall calculate the total of the various sums of tax which would have been payable by the employee in respect of his total income for each of the years concerned if the fund had not been a recognised provident fund, and the amount by which such total exceeds the total of all sums paid by or on behalf of such employee by way of tax for such years shall be payable by the employee in addition to any other tax for which he may be liable for the previous year in which the accumulated balance due to him becomes payable.
Accordingly,
Employer Contribution: Will be Taxable as Salary.
Interest on Employer Contribution: Will be Taxable as Salary.
Employee Contribution: Will be Taxable if He has availed Deduction under Section-80C. In case he has not availed deduction under Section-80C, Employee Contribution will not be Taxable.
Interest on Employee Contribution: Will be Taxable as "Income from other Sources".
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Relevant Legal Provisions at One Place
Section 17(2)(vii) & (viia)
(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer—
(a) in a recognised provident fund;
(b) in the scheme referred to in sub-section (1) of section 80CCD; and
(c) in an approved superannuation fund,
to the extent it exceeds seven lakh and fifty thousand rupees in a previous year;
(viia) the annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme referred to in sub-clause (vii) to the extent it relates to the contribution referred to in the said sub-clause which is included in total income under the said sub-clause in any previous year computed in such manner as may be prescribed;
Relevant Clauses of The Fourth Schedule (Part-A)
Employer's annual contributions, when deemed to be income received by employee.
6. That portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund as consists of—
(a) contributions made by the employer in excess of twelve per cent of the salary of the employee, and
(b) interest credited on the balance to the credit of the employee in so far as it is allowed at a rate exceeding such rate as may be fixed by the Central Government in this behalf by notification in the Official Gazette, shall be deemed to have been received by the employee in that previous year and shall be included in his total income for that previous year, and shall be liable to income-tax.
Exclusion from total income of accumulated balance.
8. The accumulated balance due and becoming payable to an employee participating in a recognised provident fund shall be excluded from the computation of his total income—
(i) if he has rendered continuous service with his employer for a period of five years or more, or
(ii) if, though he has not rendered such continuous service, the service has been terminated by reason of the employee's ill-health, or by the contraction or discontinuance of the employer's business or other cause beyond the control of the employee, or
(iii) if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer; or
(iv) if the entire balance standing to the credit of the employee is transferred to his account under a pension scheme referred to in section 80CCD and notified by the Central Government.
Explanation.
—Where the accumulated balance due and becoming payable to an employee participating in a recognised provident fund maintained by his employer includes any amount transferred from his individual account in any other recognised provident fund or funds maintained by his former employer or employers, then, in computing the period of continuous service for the purposes of clause (i) or clause (ii) the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall be included.
Tax on accumulated balance.
9. (1) Where the accumulated balance due to an employee participating in a recognised provident fund is included in his total income owing to the provisions of rule 8 not being applicable, the Assessing Officer shall calculate the total of the various sums of tax which would have been payable by the employee in respect of his total income for each of the years concerned if the fund had not been a recognised provident fund, and the amount by which such total exceeds the total of all sums paid by or on behalf of such employee by way of tax for such years shall be payable by the employee in addition to any other tax for which he may be liable for the previous year in which the accumulated balance due to him becomes payable.
Exempt Income: Section-10 (11) & 10(12)
Section 10(11):
any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 1925), applies or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette:
Provided that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1st day of April, 2021 and computed in such manner as may be prescribed:
Provided further that if the contribution by such person is in a fund in which there is no contribution by the employer of such person, the provisions of the first proviso shall have the effect as if for the words"two lakh and fifty thousand rupees", the words "five lakh rupees" had been substituted; (This is related to GPF in case of Govt. Employees).
Section 10(12):
the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule :
Provided that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1st day of April, 2021 and computed in such manner as may be prescribed:
Provided further that if the contribution by such person is in a fund in which there is no contribution by the employer of such person, the provisions of the first proviso shall have the effect as if for the words"two lakh and fifty thousand rupees", the words "five lakh rupees" had been substituted;] (This is related to GPF in case of Govt. Employees).
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Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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