Understanding EPF Taxation: Impact of the New Tax Regime on Your Savings - Read Now
The new tax regime alters EPF contributions in India. Employee contributions no longer qualify for tax deductions, but employer contributions remain exempt. Discover the implications for your savings and the EEE tax status of EPF under the new regime.
As taxpayers in India weigh the pros and cons of the new tax regime introduced by the government, one question looms large: What happens to Employee Provident Fund (EPF) contributions under this new framework? Traditionally, EPF has been known for its "Exempt-Exempt-Exempt" (EEE) tax status, which means that contributions, interest earned, and withdrawals are tax-free up to certain limits. However, the new tax regime modifies this benefit, leading to important considerations for employees.
EPF contributions and tax exemptions under the new tax regime.
The most significant alteration in the new tax system is that the employee can no longer claim tax exemption on his contributions to the EPF. In the old tax structure, section 80C contributions have always allowed for a deduction from taxable income, the most important incentive for all taxpayers. This deduction, unfortunately, is not provided under the new tax system; therefore, the employee contribution to the EPF has no tax benefit.
There has been a special provision regarding the contribution the employer makes towards EPF, which is capped at 12% of the basic salary, which shall continue to remain exempt under the new regime also. The exemption shall be continuing only if the total amount received from the employer towards contributions made towards EPF, NPS, and Superannuation does not cross Rs 7.5 lakh a year. But in case such contributions so made by the employer crosses Rs 7.5 lakhs, then the balance amount so exceeding the threshold of Rs 7.5 lakh shall be taxable.
Can You Stop Contributing to EPF?
Many employees wonder whether they can stop contributing to EPF once they switch over to the new tax regime. The response is that the contribution to EPF is compulsorily required for all eligible employees under the Employees' Provident Fund Scheme, 1952. Therefore, even if you opt for the new tax regime, the 12% EPF deduction will compulsorily be applicable after you become a registered member. Only those employees who join with a salary of Rs 15,000 and above at the time of joining, who did not opt for registration, can opt out, but once contributions start, they cannot be stopped.
Reduction in Voluntary Contributions to EPF
If you've been contributing voluntarily over and above the 12% that's mandatory, then you're allowed to scale down that. But then again, this is possible only if you have more than five years of having contributed voluntarily. Note, though, that the total contribution coming from the employee cannot be lower than that of the employer. Your contribution may be reduced, which in turn could increase your taxable salary because the employer can offset with a taxable allowance.
EEE Status of EPF in the New Tax Regime
Despite modification to the "Exempt-Exempt-Exempt" status under the new tax regime, the EPF continues to enjoy the same status. Employers' contribution, interest earned, and withdrawals still remain tax-free under a certain limit. The contribution from the employee, however does not enjoy any tax benefit under Section 80C. Therefore, while the EPF remains beneficial to enjoy tax-free growth as well as withdrawal, it offers reduced immediate tax benefits on choosing the new tax regime.
