Employees' Provident Fund (EPF): Understand its tax implications, new rules and how does it work

Are you aware of the new tax implications of the Employees’ Pension Scheme? Here are some things to know.

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There are many ways to save tax in India. For instance, you can open a PPF account, put money in the National Pension Scheme (NPS), buy life or health insurance, etc. The Employees’ Pension Scheme (EPS) or EPF is another viable government-sponsored pension plan for salaried individuals. It comes under the regulation of the Employees’ Provident Fund Organisation (EPFO), which is administered by the Central Board of Trustees.

How does the EPF work?

In an EPF, the employee along with the employer contributes 12% of the basic salary on a monthly basis. The prevailing rate of interest is added to the balance annually and offers growth on the savings until the fund matures. You can check your EPF passbook to keep track of your earnings. 

Related: How to check your EPF Balance

What are the new tax rules surrounding EPF?

When finance minister Nirmala Sitharaman announced the budget for 2021, certain changes were made in the EPF account savings scheme. Read on to learn what they are.

  • Old rule: As per the old rule that was applicable till March 2020, the employer and the employee contribution to PF amounting to 12% of the basic salary and dearness allowance were tax-free. 
     
  • New rule: As per the new rule, the interest on employee EPF contributions above the limit of Rs 2.5 lakh in a year has been made taxable from 1 April 2021. Interest on EPF account on contributions above the specified limit will also be taxed. Employee contributions up to Rs 2.5 lakh in a year towards a fund EPF will be tax-exempt. 
     
  • Amendment of the new rule: After the initial changes, the government has now increased the taxable limit from Rs 2.5 lakh to Rs 5 lakh. However, this will be applicable only in cases where the employer does not make any EPF contributions towards the fund. 

Related: 8 Situations in which you can withdraw your PF early

What are the implications for taxpayers?

EPF contribution has been a preferred tax-saving tool for most Indians. With an assured fund interest rate of 8.5 % per annum, a lot of people invest in EPF for their retirement needs. However, the Rs 2.5 lakh limit would have reduced overall earnings for most people. The decision to increase the limit to Rs 5 lakh can help salaried individuals to maximise their earnings through tax-free withdrawals. 

Related: Here’s how you can claim your EPF money

Last words

For now, taxpayers will be able to enjoy tax-free interest on EPF contributions of up to Rs 5 lakh in a year if there is no contribution by the employer, but financial experts believe there may be some changes made in the near future that may increase the tax liability of high-income earners. Although no official announcements have been made yet, it may still be advisable to explore other tax saving investment options. FAQs about the Employees' Provident Fund
 

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