Employees’ Provident Fund (EPF) is an investment scheme widely used in many countries with the objective of providing financial security and retirement benefits to employees. A common question that arises regarding EPF accounts is whether the money deposited is taxed or not?
Come, let us know here whether the money deposited in EPF account is tax-free, as well as we will try to know on which part tax (Tax on PF Interest) is levied and how it is calculated?
Is the money deposited in EPF account tax-free?
The money deposited in the EPF account is generally tax-free during the contribution stage. Both Employee Contribution and Employer Contribution are eligible for tax benefits under Section 80C of the Income Tax Act. However, there are certain conditions and limitations regarding which people should go ahead to enjoy these tax benefits to the fullest.
Taxation on EPF withdrawal (EPF Tax deduction)
Contribution to EPF account is tax-free at the time of deposit, withdrawal of money from the account is subject to taxation under certain circumstances. To better understand the taxation aspect, it is necessary to understand the two types of EPF withdrawal, one is premature withdrawal and the other is final withdrawal.
Premature withdrawal
Premature withdrawal means withdrawal of EPF funds before completion of five years of continuous service. In such cases, the amount withdrawn is subject to taxation as per the prevailing tax rates.
Final clearance
Final withdrawal of EPF funds happens when an employee retires, resigns, or reaches the age of superannuation (usually 58 years). In this case, the entire amount withdrawn is generally tax-free if the employee has completed five years of continuous service.
Calculation of taxable portion on premature withdrawal
- If a person makes premature withdrawal, the taxable portion is calculated as follows:
- Employer’s contribution and interest earned thereon is fully taxable as income for the year of withdrawal.
- Employee’s contribution is taxable. If deduction under section 80C has been claimed in any previous year.
- The interest earned on the employee’s contribution is also taxable. If it has been claimed as deduction in any previous year.
It is worth noting that the money deposited in the EPF account is tax-free during the contribution stage, due to which the employees get tax benefit. However, subject to certain conditions, premature exit may attract tax on both the employer’s and the employee’s contribution.
