Employees’ Provident Fund (EPF) is a retirement fund for organized sector employees. Employers must contribute 12% of the basic salary plus dearness allowance and deduct an additional 12% on behalf of the employee. Out of employer’s contribution, 8.33% goes to the Employees’ Pension Scheme (EPS) and earns no interest. However, the balance 3.67% and the whole of employee’s contribution portion bears an interest every year, as declared by the Employees’ Provident Fund Organization (EPFO). This has been in the 8-9% range over the past decade.
What are voluntary PF and exempted PF?
Voluntary Provident Fund (VPF) is a retirement account on a par with EPF. Employers do not contribute to it, but employees can voluntarily contribute to it. Such contributions do not enjoy any tax cut under Section 80C which EPF contributions up to ₹1.5 lakh per annum do. Despite that, VPF is attractive to some. This is because VPF earns the same interest as EPF and that interest is also tax-exempt (on contributions up to ₹2.5 lakh post Union budget 2021). Some employers have also set up exempted PF trusts for their employees. These act as a proxy for EPF and earn the same interest and have the same tax status.
How was EPF taxed before this budget’s proposal?
EPF has historically enjoyed EEE (exempt-exempt-exempt) status. Contributions are tax deductible up to ₹1.5 lakh a year under Section 80C. Interest earned on EPF, VPF and exempted PF trusts is exempt from tax (up to ₹2.5 lakh for staff contributions post the budget). EPF’s EEE status stands in contrast to the National Pension System, which had exempt-exempt-taxable status.
What EPF tweaks were introduced in budget?
Some high-earners were contributing large amounts to the EPF and enjoying tax-free interest on it every year. The Union budget has capped the tax exemption to interest on employee contributions up to ₹2.5 lakh per annum, affecting those employees with a salary above ₹20.8 lakh. For example, if an employee with a salary of ₹30 lakh contributes ₹3.6 lakh to EPF, then the interest earned on ₹1.1 lakh shall be taxable at the slab rate. Interest on contributions up to ₹2.5 lakh shall continue to be tax-exempt.
Are there alternative investment options?
An employee earning a high salary may have to adopt a mix of EPF and NPS to maximize returns and minimize tax outgo. Returns on NPS are tax-exempt until withdrawals are made from the account upon maturity. At this point, 60% of the corpus is tax- free while 40% must be used to buy an annuity, which is taxable. While not EEE, this tax structure may work out to be more favourable than the taxation at slab rate that EPF interest on contributions above ₹2.5 lakh will be subjected to.
