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You could lose section 80C tax benefit on EPF contribution; here's why
May, 17th 2024

Employees’ Provident Fund (EPF) is part of the compensation salaried people get. Employers deduct this money and put it in a PF account that is either managed by them through a trust or by the Employees' Provident Fund Organisation (EPFO). If the employer has a PF trust, it is important to understand if the trust is “exempted” or “unexempted”. This status has a bearing on the tax benefits an employee can claim on the EPF contribution, under Section 80C and other sections.

Impact of EPF trust status on tax benefit

The contribution made to an EPF account managed by the EPFO or exempted trust is eligible for certain tax benefits. A salaried individual can claim a Section 80C deduction on his own's EPF contribution. There is no tax on the employer's contribution to such EPF accounts, subject to certain conditions. The interest earned on both employer and employees' contributions are exempted from tax, subject to certain conditions. EPF money is tax-exempt at the time of maturity.

 

Saraswathi Kasturirangan, Partner, Deloitte India, says, "If the EPF is an exempted trust, then employees contributing to such EPF trusts will have the same tax benefits as those with the EPFO."

However, the tax benefits are not available on an unexempted EPF trusts.

 

Saraswathi Kasturirangan says, "Employees do not get any deductions for PF contributions made towards an unrecognised EPF trust under Section 80C of the Income-tax Act, 1961. As regards employer's contributions towards unrecognised EPF trusts, the contributions are taxed in the hands of the employees. Further, interest earned from both employers' and employees' contributions from such unrecognised EPF trusts is also taxable."

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Concurring with the views, Sanket Jain, Partner, Pioneer Legal says, "The contributions made by the employee towards EPF in an unexempted trust are not eligible for tax deduction under Section 80C of the Income Tax Act. The interest earned on the EPF balance in an unexempted trust is taxable and thus, added to the employee's income and taxed at their applicable income tax slab rate."

How EPF contributions to unexempted trusts are taxed

Some organisations run an unexempted trusts and deduct the EPF contributions from their employees. The contribution deposited to the unexempted EPF trust has two components: employees' and employer's contributions. Interest is earned on both the contributions.

Saraswathi explains how unexempted EPF trusts are taxed:

  • Employee's contribution: The employee's contribution is taxable under the head gross salary. Deduction under Section 80C is not available to make the contribution exempted from tax. However, at the time of maturity or withdrawal, the employee's own contribution will be exempted from tax. This is because it has been taxed at the time of contribution.
  • Interest earned from employee's own contribution: The interest earned from the employee's own contribution are taxed at the time of withdrawal or maturity, whichever is earlier. The interest earned from an employee's own contribution is taxed under the head income from other sources.
  • Employer's contribution: The employer's contribution is taxable in the hands of an employee. The employer's contribution will be taxed at the time of withdrawal or maturity. It will be taxed under the head salaries.
  • Interest earned from employer's contribution: The interest earned from employer's contribution is also taxable either at the time of withdrawal or maturity. The interest earned will be taxed as "Profit in lieu of salary".

All the above are taxed at the income tax slab rates applicable to the employee's income.

How employers manage employee's EPF money

An employer can operate an EPF scheme either with the EPFO or as a self-managed trust.

When the EPF scheme is managed via the EPFO, the employer deposits his own contributions as well as the employees' contributions to the EPF account held with the EPFO. An employee can access the EPF account through the Member e-Sewa portal.

When the EPF scheme is self-managed by the employer, the trust that manages the EPF money can either be "exempted" or "unexempted".

Jain says, "An exempted trust is one which is recognised by both the EPFO and the Income Tax Department. These trusts are required to follow the specified EPFO rules to manage employees' money. An unexempted trust is one which is not recognised by the EPFO or by the Income Tax Department. These trusts usually do not follow EPFO guidelines to manage the EPF money."

So when you are joining or switching jobs, it is important to understand how your employer is managing your EPF contribution to ensure that you get tax benefits.

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