Employees Provident Fund Scheme – Taxability

The Employees’  Provident Fund & Miscellaneous Provisions Act, 1952 takes care of the retirement, medical, housing, financing of insurance policy, and education of children and family needs of the members.

How the Employees’ Provident Fund Scheme works:

As per the Employees’ Provident Fund & Miscellaneous Provisions Act,1952 , both the employees and employer compulsorily need to contribute to the fund at the rate of 12% of the basic wages, dearness allowance and retaining allowance, subject to a maximum of Rs.6500/- per month. Voluntary higher contributions are also acceptable at the joint request of the  member and the employer. The rate of contribution is 10% in the case of following establishments:

• Any establishment covered with less then 20 employees prior to 22.09.1997.
• Any specified sick industrial  company and which has been declared as such by the Board for Industrial and Financial Reconstruction,
• Any establishment which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and
• Any establishment engaged in manufacturing of (a) jute (b) Breed (d) coir and (e) Guar gum Industries/ Factories.

The interest is credited to the members account on monthly running balance with effect from the last day in each year. The  rate of interest is 9.5% for the year 2010-11 as notified by the Government.  Out of 12% (or 10% as the case may be) of the employer’s share of contribution, 8.33% is to be remitted towards pension fund.

Treatment as per the Income Tax Act,1961

Under the provision of the Income Tax Act, 1961 following is the tax treatment of contribution and interest on EPF

• Employee can claim deduction u/s 80C for his own contribution.
• Employer contribution is exempted upto 12% of Salary (basic and dearness allowance).
• Interest on EPF is exempted upto 9.5%.
• Amount received at the time of termination is also exempt from tax.

Timely and  efficient tax planning  go long way in lowering your total taxes by employing and taking advantages of in-built provisions of tax exemptions, deductions, concessions, rebates, relief’s, allowances and other benefits granted by the tax laws so that the  incidence of tax reduce.

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