How & When Your EPF Account Becomes Taxable?

Among the fixed income instruments apart from Public Provident Fund (PPF) and Fixed Deposits (FDs), the Employees' Provident Fund is the most favoured instrument to bet due to its higher interest rate, safety and tax exempt-exempt-exempt status in nature. The EEE status of EPF makes it more appealing than that of PPF and FDs because the maturity amount, interest received and contributions made towards EPF are completely free from tax subject to some conditions. But the twist that comes after the EEE status of EPF is that there are certain scenarios when your EPF account becomes taxable. So, without further ado, let's get to the point and talk about how and when contributions, interest received, and withdrawals from an EPF account are taxed.

Contribution towards EPF

An employer contribution to an EPF account is taxable with effect from April 1, 2020, if they surpass Rs 7.5 lakh in a fiscal year. According to a new rule unveiled in Budget 2020, if an employer's overall contribution to the National Pension System (NPS), superannuation fund, and EPF account of an employee surpasses Rs 7.5 lakh in a fiscal year, the surplus contribution becomes subject to taxation in the hands of the employee and is represented in Form 16 of that employee. If you are an employee that doesn't have an NPS account or do not have exposure to a superannuation fund, and your employer's contribution to your EPF account, on the other hand, is Rs 8 lakh in a fiscal year, in this instance also the surplus amount will be taxable in your hand.    

Interest earned on EPF account

According to the EEE status of EPF, the interest earned on the EPF account is also tax-free as well, but there are instances when the interest earned becomes taxable. In force from April 1, 2021, if an employee's contribution to the EPF account, together with surplus contributions through the Voluntary Provident Fund (VPF), surpasses Rs 2.5 lakh in a fiscal year, the interest received on surplus contributions will be taxable to him or her. That being said, the employee's sole contribution up to Rs 5 lakh in a fiscal year is tax-exempt, if no employer contribution is made to the EPF account of that employee. In some situations, there is an unwithdrawn amount in dormant EPF accounts. In this situation, the EPF account maintains to generate interest on the EPF contributions, and the interest received on deposits in inactive EPF accounts is subject to taxation to the responsible employee.    

Withdrawal from EPF account

If a withdrawal is made by an employee from the EPF account upon maturity, or if a partial withdrawal is undertaken, the withdrawal is tax-free. Even if a withdrawal is made from the EPF account as a COVID advance to cope with a crisis, the withdrawn amount will not be taxable in the hands of the responsible employee. If an employee leaves his or her employment and does not find another employer within two months, he or she is entitled to make a complete withdrawal from the EPF account. Considering this instance, the taxation of the withdrawal amount from the EPF account will be determined by the duration of the active period of the EPF account. Such as, the withdrawal is tax-free if it is made from the EPF account after 5 years of continuous service or employment. This means that if you have less than 5-years of continuous service, then the withdrawn amount (if any) will be subject to taxation in the hands of the responsible employee. Furthermore, in case the withdrawal amount surpasses Rs 50,000, TDS at the rate of 10% would be levied. Please note that TDS on EPF withdrawals is levied on amounts higher than Rs 50,000 withdrawn before the expiration of 5 years of employment or continuous service.