Employees’ Provident Fund (EPF) is an important part of a salaried individual’s compensation. It provides significant tax benefits under Section 80C of the Income Tax Act, 1961.
However, these benefits are dependent on whether the EPF is maintained by the Employees’ Provident Fund Organisation (EPFO) or an employer-run trust, which might be “exempted” or “unexempted.”
Some companies run an unexempted trust and deduct employees’ EPF contributions.
Basically, there are two parts to the contribution made to an unexempted EPF trust. The ‘Employer Contribution’ and the ‘Employee Contribution’, and interest is earned on both contributions.
Tax Implications for Unexempted EPF Trusts
Contributions to unexempted EPF trusts have different tax implications they are as follows:
– Under Section 80C, employees receive no tax benefits for contributions to unexempted EPF trusts.
– The interest earned on an employee’s own contributions is taxed at the time of withdrawal or maturity, whichever comes first. This interest is categorized under “income from other sources”.
– Employer contributions are taxable to the employee and are taxed at the time of withdrawal or maturity, classified under “salaries”.
– The interest earned on employer contributions is also taxable at withdrawal or maturity, categorized as “Profit in lieu of salary.”
Benefits of Exempted EPF Trusts
Employees who contribute to an EPFO-managed EPF account or an exempted trust benefit from several tax benefits.
Salaried persons can claim a Section 80C deduction for their own EPF payments. Additionally, employer contributions to such accounts are tax-free, depending on certain conditions.
The interest on both employee and employer contributions is tax-free, and the EPF corpus is tax-free at maturity.
Also Read: EPFO Introduces Auto Claim Settlement for Education, Marriage and Housing
How to Manage EPF Contribution
Employers can manage EPF schemes through either the EPFO or a self-managed trust.
An exempted trust, recognised by both the EPFO and the Income Tax Department, follows EPFO criteria and gives full tax benefits.
On the other hand, unexempted trusts, which are not recognized, do not follow these rules, which leads to taxable contributions and interest.
When starting or switching jobs, it is important for employees to understand how their employer controls EPF contributions. Knowing whether the EPF trust is exempt or not might help employees maximize their tax benefits and avoid unexpected tax liabilities.
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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing.
