Income Tax Benefits on EPF Contribution: New Vs Existing Tax Regime

Monisha Chaudhary

10 Jul, 2023

Earlier, the employer was required to contribute 12 percent of the employee’s salary in the EPF account, and such EPF contribution was exempted from tax. But, after the announcement of the budget 2020 by our Union Finance Minister Nirmala Sitharaman, a new tax-regime has come into force, wherein lower income tax rates are prescribed for an individual, but on a condition that the concerned individual is required to forego commonly availed tax deductions and exemptions. Hence, the new tax regime is optional in nature. Lastly, in this article, we will be talking in detail about the various available Tax Benefits on EPF contribution both in existing and new tax regime.

EPF stands for Employee Provident Fund. It is a scheme governed and administered by an authority named Employees Provident Fund Organization (EPFO) established under the Employees Provident Funds and Miscellaneous Provisions, Act 1952. Further, the Employees Provident Fund Organization is the largest social security body with a large number of financial transactions taking place every day. Moreover, EPF is the benefit that is availed by the employee on their retirement in the form of a Provident Fund.

Obtaining EPF Registration is mandatory for those establishments and factories which consist of 20 or more employees. Moreover, it is compulsory for those organizations as well who receive two-month notice from the central government regarding compulsory EPF Registration.

Tax Benefits on EPF Contribution

In the existing tax regime, an employer was required to contribute up to 12 percent of an employee’s salary in the EPF account. Moreover, such income contributed is exempted from tax. Also, if any contribution made in a financial year is exceeding the threshold of 12 percent, then such contribution will be taxable in the hands of the concerned employee. However, this criterion will remain unchanged in the proposed new tax regime as well. Hence, in the Financial Year 2020-2021, even if an individual opts for a new tax regime, he or she will not be required to pay any tax on the contribution made by the employer in the concerned EPF account, unless the same exceeds the threshold of 12 percent in that financial year.

Further, in the Financial Year 2020- 2021, if an individual taxpayer chooses to continue with the existing tax regime only, then he or she is qualified to claim a tax break for the EPF contribution made by him. In contrast, if an individual taxpayer chooses to go for the proposed new tax regime, then he or she is required to give up 70 different tax exemptions and deductions provided to him, which also includes the popular tax deductions of Section 80C. Thus, as per the new tax regime, the taxpayer will not be entitled to claim tax benefits for his or her contribution to the EPF account.

Tax Break that an Individual can claim in New Tax Regime

It is significant to note that under the new tax regime, all is not lost, as there is a concept of one tax break that an individual taxpayer can avail in this new tax regime. The new tax system allows a deduction on the contribution made by the employer towards the Tier-I NPS (National Pension Scheme) account on behalf of an employee.

An employee can claim the concerned deduction under section 80 CCD subsection (2) of the Income Tax Act, 1961. Further, the maximum deduction available under this section is 10 percent of the employee’s total basic salary plus DA (Dearness Allowance). Also, in the case of government employees, the prescribed limit is increased to 14 percent of their basic salary plus DA (Dearness Allowance).

On the other hand, the tax benefit provided under section 80 CCD of subsection (2) can only be chosen by an employee if his or her concerned employer agrees to contribute to employee’s Tier-I NPS (National Pension Scheme) Account. Also, the concerned employee is required to restructure his or her salary in such a scenario.

Tax Exemption Limit on Employer’s Contribution

It is significant for an employee to note irrespective of whether he or she opts for the proposed new tax system or continues with the existing one. The Annual Budget of the Financial Year 2020 – 2021 has proposed a new tax system, in which there is a restriction regarding the maximum amount contributed by the employer that can be considered as an exemption. Further, the word contribution means the amount deposited by the employer in an employee’s EPF account, NPS account, and Superannuation fund on an aggregate basis.

Further, as per the budget proposal, if in a financial year the contribution made by the employer in employee’s EPF account, Tier – 1 NPS account, and Superannuation fund on an aggregate basis exceeds the threshold of Rs 7.5 lakhs, then the excess amount will taxable in the hands of the employee. Also, any interest and return earned on the excess contribution made, then the same will be taxable in the hands of the employee too.

Therefore, whether an employee opts for the new tax regime or existing one, he or she needs to make sure that the contribution made by the employer in his or her EPF account, superannuation fund and Tier-I NPS account on aggregate basis is not exceeding the threshold of Rs 7.5 lakh in FY 2020-21 or else he or she will be liable to pay tax on the excess amount contributed by the employer.

However, subject to the above-mentioned provisions, the interest earned and the maturity amount of the EPF account continue to remain exempted in the new tax system also, as they are an exemption in the existing tax system.