How new EPF Rule affect your Taxes?

Introduction

The Finance Minister has announced in Indian Budget 2021 that the interest on employee contributions will be taxable from April 1 2021. Presently, the interest on Employee Contributions to Provident Fund is fully exempt.

Employee Provident Fund

Employee provident Fund is a savings scheme which is to be used for Post retirement by employee all over the country. The Employer and Employee should Contribute minimum 12% each of basic Salary. Interest will be accumulated on both contributions in EPF account

Employee Provident fund Interest Rate

• The Current interest rate of Employee Provident Fund is 8.1% for FY 2022-23.. This Interest is calculated every month and transferred to Employee provident fund account on 31st March.
• The Interest rates are pre decided by the Government.

Employer Contribution

Employer Contribution towards EPF is tax exempted up to a certain limit. As per new rule, Employer Contribution to EPF, National Pension Scheme and Superannuation Fund on an aggregate basis exceeds Rs 7.5 lakhs, it would be taxable in the hands of employee.

Employee Contribution

Employee Contribution to PF can be claimed as deduction u/s 80C upto a limit of Rs 1.5 lakhs. If PF is withdrawn at the time of maturity or after five years of continuous service then it is tax exempt.

Key Changes in Budget 2021

Key Changes in Budget 2021 about taxability of Interest on Employee Contribution and how it effects your Salary & Taxes?

1. If the Employees Contribution to provident fund on or after April 2021exceeds Rs 2.5 lakhs in any year, Interest earned on contribution over Rs 2.5 lakh is Taxable
2. This rule applicable only to Employee Contribution
3. This will have impact specifically on High Income Salaried Individuals who usually contribute more than 2.5L
4. Employees who are contributing in excess (employer's match) will also be effected due to this provision

Key Changes in Budget 2023

Earlier the rate of TDS on taxable EPF withdrawal is 30% in Non-PAN cases. NEW   As per Budget 2023 i.e., w.e.f 1st Apr 2023, TDS rate on EPF withdrawal is reduced to 20%

New Vs Old Personal Income Tax Regime from FY 2020-21

Top three observations from the analysis were

1. New Tax Regime is Good if you want higher take home salary
2. Higher Deductions Higher Tax Savings with Old Tax Regime
3. To switch to New Tax Regime, you need to work with your employer

Pictorial analysis on New Vs Old Personal Income Tax Regime