EMPLOYEES’ PROVIDENT FUND (EPF)

What is EPF

The Employees’ Provident Fund (EPF) is a savings scheme introduced under

Employees’ Provident Fund and Miscellaneous Act, 1952. It is administered
and managed by the Central Board of Trustees that consists of representatives
from three parties, namely, the government, the employers and the employees.
The Employees’ Provident Fund Organization (EPFO) assists this board in its
activities. EPFO works under the direct jurisdiction of the government and is
managed through the Ministry of Labour and Employment. scheme basically
aims at promoting savings to be used post-retirement by various employees all
over the country. Employees’ Provident Fund or EPF is a collection of funds
contributed by the employer and his employee regularly on a monthly basis.
The employer and employee contribute 12% each of the employee’s salary
(basic + dearness allowance) to the EPF. These contributions earn a fixed level
of interest set by the EPFO. The amount of interest to be received on the
deposit along with the total accumulated amount is totally tax-free, i.e. the
employee may withdraw the entire fund without worrying about paying any
kind of tax on it.

The accrued amount may also be withdrawn by the nominee or the legal heir of
the employee post his death or can be withdrawn by the employee himself post-
resignation.

Interest Rate on EPF

The interest rate for the financial year 2020 – 2021 is 8.50%. The accumulated
fund in the PF account attracts certain interest which is 100% tax exempted.
The interest earned is directly transferred to the Employees’ Provident Fund
account and is calculated depending upon the rate which is pre-decided by the
GOI along with the Central Board of Trustees (CBT). The CBT administers the
Act.

The year in which the new interest rates are announced stays valid for the next
financial year i.e. from the year starting on 1st April of one year to the year
ending on 31st March of the next year. Let’s understand this with the help of
an example:

 The rate of interest i.e. 8.50% is valid and will be applicable only on EPF
deposits made between the financial years of April 2019 to March 2020.
 The interest even though calculated on a monthly basis, is
transferred to the Employees’ Provident Fund account only on a
yearly basis on 31st March of the applicable financial year.
 The transferred interest is summed up with the next month i.e. April’s
balance and is then again used for calculation of the interest.
 If the contribution is not made into an EPF account for thirty-six months
continuously, the account becomes dormant or inoperative.
 Interest is offered on inoperative accounts of employees who have not
attained the retirement age.
 Interest is not provided on the amount deposited in inoperative accounts
of retired employees.
 The interest earned on inoperative accounts is taxable as per the
member’s slab rate.
 For contributions made towards the Employees’ Pension Scheme by the
employer, the employee shall not receive any interest. However, a
pension is paid out of this amount after the age of 58.
Employees’ Provident Fund (EPF) Schemes

Employees’ Provident Fund Scheme, 1952

Employees’ Pension Scheme, 1995

Employees’ Deposit Linked Insurance Scheme, 1976

The scheme caters to the needs of more than 5 crore members and is governed
by three Acts.

Eligibility Criteria

 Employees need to become an active member of the scheme in order to

avail benefits under this scheme

 Employees of an organization are directly eligible for availing Provident

Fund, insurance benefits as well as pension benefits since the day they
join the organization.

 Any organization employing a minimum of 20 workers is liable to give

EPF benefits to the workers.
 This scheme does not cater to the needs of people residing in Jammu
and Kashmir.

How to Register for EPF?

 Visit the government website Employee Provident Fund Organisation

(EPFO)
  Go to the section of ‘Establishment Registration’ that opens up a new
page with ‘Instruction Manual’. It will explain the process of Employer
Registration, followed by registration of DSC [Digital Signature
Certificate] of the Employer which is a prerequisite for fresh application
submission
 Accept ‘I have read the instruction manual’ tickbox to proceed and fill in
the details to register
 An email e-link is sent which is to be activated and mobile PIN is also
sent. You need to upload certain documents to register
 Those who are already registered can log in using their Universal
Account Number (UAN)

How to Login to EPF?

You need to visit the member website of EPF i.e. EPF e-SEWA/EPF Members
Portal and on the right side you have the option to login using UAN. However,
UAN must have been activated earlier.  

EPF KYC Update

 Visit EPF Members Portal and login using UAN & Password
 As the new page opens up, under the section of ‘Manage’, click on KYC
from the dropdown menu
 Update the details like name and number of PAN, Aadhar, Bank
documents, etc.
 Save it and it will show as Pending KYC as long as it is verified from the
other end

EPF UAN Activation

  You need to visit the member website of EPF i.e. EPF e-SEWA/EPF
Members Portal
 On the right corner below, you will find the option of ‘Activate UAN’ and
click on it
 As the new dashboard opens up, enter either UAN, PAN or Aadhar and
other details as Name, Birth date, etc according to EPFO records
 Enter the ‘captcha’ code and get authorization PIN on your registered
mobile with EPFO
 Use the One Time Password (OTP) to validate and activate the UAN
online
 Another message will be sent to confirm activation of UAN
 Once UAN is activated, you can login using it to check the status of
Provident Fund

EPF Contribution

The Employees’ Provident Fund is a fund where both the employer as well as
the employee contributes a part of the salary. These contributions are made
regularly on a monthly basis. The interest rate fixed depends upon the
employee’s basic pay along with the dearness allowance in his salary. Here is a
breakup of the EPF Contributions:

Monthly Percentage Contributed

Contribution By
(%)

Employee 12/10*

Employer 12/10*

Total 24%

*10% EPF share is valid for the organisations– where there are 20 or less
than 20 employees /organisations with losses incurred more than or equal to the
net worth (at the end of financial year) /organisations declared sick by the Board
for Industrial and Financial Reconstruction

**12% Employer’s contribution includes 3.67% EPF and 8.33% EPS

For Example:

If the monthly salary of a person is Rs.30,000. The contributions calculated are

as follows-

 12% of Rs.30,000 (Employee share)= Rs.3,600

 3.67% (in EPF) of Rs.30,000 (Employer’s share)= Rs.1,101
 8.33% (in EPS) of Rs.30,000 (Employer’s share)= Rs.2,499
 Total= Rs.7200/-

A) Employee’s Contribution towards EPF

In general, the contribution rate for the employee is fixed at 12%. However, the
rate is fixed at 10% for the below-mentioned organizations:

 Organizations or firms employing a maximum of 19 workers.

 Industries declared as sick industries by the BIFR
 Organizations suffering annual loss much more as compared to their net
value.
 Coir, guar gum, beedi, brick and jute industries.
 Organizations operating under wage limit of ₹ 6,500.

B) Employer’s Contribution towards EPF

The minimum amount of contribution to be made by the employer is set at a

rate of 12% of ₹ 15,000 (although they can voluntarily contribute more). This
amount equals to ₹ 1800 per month. It means that both the employer as well
as the employee has to contribute ₹ 1800 each per month towards this
scheme. Initially, this amount was set at 12% of ₹ 6,500 which would equal to
₹ 780 to be contributed both by the employer and the employee.

 The contribution from both the parties is deposited into the EPFO
(Employees Provident Fund Organisation)
 This is a long-term investment fund for the contributors which helps
them continue an independent life after retirement
 EPF also provides its contributors the loan facility in need

Important Points Related to EPF Contributions

 The contribution made by the employee goes totally towards the

provident fund of the employee.

 The contribution made by the employer is divided into different

parts.

 Total contribution made by the employer is distributed as 8.33%

towards Employees’ Pension Scheme and 3.67% towards
Employees’ Provident Fund.

 Apart from the above-made contributions, an additional 0.5%

towards EDLI has to be paid by the employer.

 Certain administration costs towards EDLI and EPF standing at

the rate of 1.1% and 0.01% respectively also have to be incurred
by the employer.

 This means that the employer has to contribute a total of 13.61%

of the salary towards this scheme.
Calculation of Interest Rate on EPF

The interest rate is announced on a yearly basis, whereas, the interest is

calculated on a monthly basis. The interest rate is calculated by dividing the
per annum rate by 12. This is done in order to arrive at the amount of interest
to be given to the employee for a particular month.

For example :

 If the interest rate per annum is set at 12% then the rate of interest for
any particular month in the given year will be calculated as 12/12= 1%
per month.

Let’s suppose that an employee started his contributions from the month of
November 2018.

 The applicable rate of interest for him will stand at 8.50%.

 In this case, the rate of interest per month will be 8.50/12=0.7083%.
 The employee directs 12% of ₹ 15,000 which is equivalent to ₹ 1,800 per
month towards his EPF account.
 This amount is transferred to the employee’s EPF account at the end of
every working month and is reflected as a component of the total salary.

The employer makes a contribution of ₹ 1,800 which is equivalent to the

contribution made by the employee.

 3.67% of the employer’s contribution is made towards EPF account and

 8.33% of the contribution is made towards the employee’s EPS account

 The employer’s contribution to the employee’s account stands at 3.67%

of ₹ 15,000 which is equal to ₹ 550.
  The monthly contributions made by the employer and the employee
towards this account amounts to ₹ 1800+ ₹ 550, which is equal to ₹
2350.

1. The balance calculation for the next month  (December) will be done
in the given manner:

 Balance carried forward from November 2019= ₹ 2,350.

 Interest earned for the month of December 2019 = ₹ 16.75
 Balance at the end of December 2019 = ₹ 2,350 + ₹ 2,350 = ₹ 4,700

Note: Although interest has been earned in December 2019, it is only credited
at the end of the financial year on 31st March.

EPF Forms

An EPF form is mandatory for all activities that employees wish to undertake in
their accounts; the activities include registration, withdrawal, transfer of PF,
availing loans from an existing EPF account or for any other reason.

Mentioned below are the various types of forms available :

Forms for EPF Claims

EPF For
Use of the EPF Form
m

Form 31 EPF Withdrawal

Form 14 Buying LIC Policy

Form 10D For claiming monthly pension

Form 10C For claiming withdrawal benefits/scheme certificate of EPS

 Form 11 EPF Account Transfer

Form 19 Final Employees’ Provident Fund Settlement

Form 20 EPF Final settlement in case of death of the employee

Form 2 Declaration and nomination form for EPF & EPS

Form 5 IF Claim as per EDLI scheme

Form 15G To save TDS on the interest income on EPF

Form 5 New employees registering for EPF and EPS

Form 11 Auto transfer of EPF

EPF Payment

Given below are the steps to be followed to process the payments:

1. Login to EPFO Portal using the Electronic Challan cum Returns (ECR)

credentials
2. Click on ‘Payments’ and go to ‘ECR upload’
3. Select Wage Month, Salary Disbursal Date, Rate of Contribution
4. Proceed to upload ECR text File. You will see a pop-up saying ‘File
Validation Successful’ in case the uploaded file is validated for predefined
conditions. However, if the file is not validated, ‘Error’ appears on the
screen
5. The TRRN will be displayed on the screen, Click on ‘Verify’
6. Click on ‘Prepare Challan’ to obtain summary sheet for ECR
7. Go to Admin/Inspection Charges and select ‘Generate Challan’
8. Click on ‘Finalize’ and proceed to pay
9. Choose ‘Online’ as the payment mode and choose any bank account
10. Once you select your respective bank account, you will be
redirected to the online banking website of the same bank
 11. Make payment using Net Banking

Once the payment is successfully made, a confirmation will be generated with

Transaction-id and e-Receipt. The transaction will further be uploaded on the
EPFO Portal and confirmation via TRRN number provided accordingly.

EPF Passbook

All contributions made by a member and his employer are mentioned in

the EPF passbook. The passbook also contains other important details such as
establishment ID and name, member ID and name, office name, employee’s
share, employer’s share, EPS contribution, etc.

The member can download the EPF passbook online by visiting the EPF
website.

Checking EPF Balance

A member can check the EPF balance accumulated in the account online by
following these simple steps:

 Visit EPF’s website at www.epfindia.gov.in  

 Go to “For Members” in the “Our Services” section
 Click on the “Member Passbook” option
 Now enter your “UAN”, password and captcha code and login to your EPF
account
 Select the “Member ID” to view your passbook
 Your passbook will be displayed with complete details in the document.

The member can also check his EPF balance by sending

an SMS to 7738299899 in the format EPFOHO <UAN> ENG.
EPF balance can also be checked through a missed call on the number- 011-
22901406.

How to Transfer EPF Online?

 Log in to the EPFO members’ portal using your UAN and password

 Go to the ‘Online Services’ tab on the main menu of the home page and
select ‘Transfer Request’ to generate an online transfer request
 A new dashboard displaying all your personal details will be shown.
Verify all of that like DOB, EPF and date of joining, etc. soa s to claim the
process
 Once you verify, go to Step 1, select the option of previous or present
employer and then provide the details of the previous employer through
which you want to claim
 Submit the details, an OTP will be sent to your registered mobile
number. You need to authenticate your identity by entering the OTP,
then only the request will be submitted and an online filled-in form will
be generated. You need to sign the form and send it to your present or
previous employer
 The employer will also get an online notification about the EPF transfer
request. EPFO Office will process the claim only after employer digitally
forwards the claim to the EPFO  after verifying your employment details
 Post submission of the request, you can check the status of your EPF
transfer claim under the ‘Track Claim Status’ menu, which is under the
‘Online Services’ menu

How to Activate Inoperative Accounts?

Inoperative or dormant accounts are those which have not seen a contribution
in over 36 months. Generally, it happens when a member has not transferred
the old account to his new employer and tends to forget about the previous
contributions. One can either transfer them to the current EPF account as per
the above mentioned steps or withdraw them using UAN number.

Lodging EPF Grievances

The EPFO also provides for a grievance system which enables members to
register their complaints.

 The members may lodge their complaints by clicking on the ‘Register

Grievance’ tab at EPFiGMS.gov.in.
 Members have to fill in all the relevant details pertaining to their account
along with the description of the grievance that they have been facing.
 Relevant files related to the grievance being faced can be uploaded on the
site.
 The member may also track the status of the grievance by clicking on the
‘View Status’ tab.

EPF on Umang App

Mobile users can avail services provided by the EPF through the Umang app.
The portal has five separate sections:

EPF Services on Umang App

 Employee Centric Services

 General Services

 Employer Centric Services

  Pensioner Services

 eKYC Services

Employee Centric Services

Employee Centric Services

View Passbook

Raise Claims

Track Claims

General Services

EPF General Services

Search Establishment

Search EPFO Office

Know Your Claim Status

Account Details on SMS

Account Details on Missed Call

Employer Centric Services

Employer Centric Services

 Get Remittance Details by Establishment ID

  Get TRRN Status

Pensioner Services

Pensioner Services

View Passbook

Update JeevanPramaan

eKYC Services

Aadhaar seeding can be done directly through the Umang app.

Benefits Of EPF Scheme

EPF scheme is among one of the largest and biggest saving schemes available
to Indian employees. The key benefits of the scheme are mentioned below:

1. Tax-Free Savings: EPF Scheme provides certain interest on the deposits

at a specific rate which is pre-decided by the organisation. Both the
amount of interest received on the deposits and the actual deposited
amount is deemed to be tax-free by the Indian Government. Any kind of
withdrawal made at maturity or post completion of 5 years of having
availed the scheme is 100% tax exempted. However, if the amount is
being withdrawn prematurely (within 5 years) it is not free of tax. This
feature helps an employee receive special benefits in the form of added
income to his savings in the form of interest.
2. Long-Term Financial Security: Funds deposited in this account cannot
be withdrawn easily and hence, helps in ensuring savings.
3. Retirement Period: The accumulated fund under this scheme may be
used at the time of retirement of the employee. This provides relief to the
retired employee in the form of monetary security.
4. Unseen circumstances: The accumulated fund can be used by the
employee in case of any kind of emergency. The employee may choose to
withdraw his/her fund prematurely. The scheme provides for such pre-
term withdrawals in certain special cases.
5. Unemployment/Income Loss: In case, where the employee loses
his/her current job owing to any reason, then these funds may be used
to meet expenses.
6. Resignation/Quitting of Job: The employee post-resignation is free to
withdraw his/her 75% of the EPF fund after one month of the date of
having quit the job and remaining 25% after 2 months of unemployment.
7. Death: In case of death of the employee, the collected amount along with
the interest is given to the employee’s nominee thus helping the family
tide through difficult times.
8. Disability of the employee: If the employee is no longer in the position
to work then he/she may use these funds to help him/her get over the
difficult time.
9. Lay-off: In cases of sudden layoffs or retrenchment from the job, this
fund may be used by the employee until the time he/she gets another
suitable job.
10. Long run savings: A safe and full proof saving scheme for
individuals wishing to have long run investments.
11. Liquidity of funds: This scheme acts as a sound source of income
for an individual at the hour of financial crisis. The funds so obtained
may be used to meet unavoidable expenses like medication needs or
education needs.
12. Pension Scheme: The employer not only contributes towards the
PF fund but also makes the necessary contributions towards the
 employee’s pension which can be later used by the employee post-
retirement.
13. Insurance Scheme: The act also provides for certain provisions
whereby, the employer is required to make certain contributions towards
an employee’s life insurance where group insurance cover is not present.
This scheme ensures that the employees are properly insured.
14. Accessible All Over: With the help of the Universal Account
Number (UAN), employees can easily get access to their PF account via
the EPF member portal. They can transfer their accounts whenever they
make a shift in their current jobs.

EPF Customer Care number

In case of any doubts or discrepancies, please contact the customer care line of
EPFO:

Helpdesk- 1800118005 (Toll Free)

Head Office:

BhavishyaNidhiBhawan,

14, BhikajiCama Place,

New Delhi- 110066

FAQs

1. I have withdrawn a part of my EPF corpus. Will I continue getting

interest on the withdrawn amount as well?

Ans: No, You will not get interest on the withdrawn amount. However, the
amount remaining in the EPF account will continue earning interest.
2. How is UAN assigned?

Ans. When you join a company having more than 20 employees, you become
entitled to EPF benefits. EPFO allots a unique 12-digit permanent number
known as Universal Account Number (UAN) to the member. All PF accounts of
a member are linked with his UAN. In case you want to avail online services
through the EPF portal, you have to link your UAN with Aadhaar and PAN.

3. Will I have to activate my UAN for transferring PF online?

Ans. You have to activate UAN by registering at the EPF member portal before
you can process claims or withdraw funds online. You can do it easily by
visiting the EPF member portal.

4. I have switched my job. Should I get a new UAN?

Ans. No, the UAN allotted to a member remains the same throughout the
service period. A new PF account will be opened by the new employer which
will be linked to the UAN of the member.

5. I have switched my company. Should I withdraw EPF corpus or transfer

my fund?

Ans. It is recommended that you transfer your fund from the old PF account to
a new one. If you withdraw the amount before 5 years of service, the withdrawn
amount is taxable and should be mentioned under income from other sources
while filing ITR.

6. I am currently unemployed and need funds. Can I withdraw my EPF

corpus?
Ans. Yes, you can withdraw 75% of your EPF corpus after one month of
unemployment. In case you remain unemployed for 2 consecutive months, you
can withdraw the remaining 25% of the fund.

7. Is it still mandatory for members to link Aadhaar with EPF to avail
online services? If not, is there a way to delink Aadhaar with UAN?

Ans. As per the recent circular released by the EPFO, UIADI has clarified that
EPFO can continue to avail Aadhaar based authentication services for EPF
schemes. So, in a way, you can not avail your EPF online services in case you
delink your Aadhaar with UAN, as for now.

The circular also goes on to say that if a member visits the EPFO office for an
offline claim using Aadhaar KYC, the PRO will facilitate Aadhaar seeding
facility on the spot in order to make the EPF claim online.

Further, employees with their Aadhaar seeded with the UAN may not be
allowed to raise offline claims from now on.

8. Are both the employee’s and employer’s contributions to my EPF

account tax-exempt?

Ans. Contributions made to the EPF are tax exempt, however, the tax
calculations are different. The employer’s contribution to the EPF account is
not considered as part of your taxable income. So the employer’s contribution
is tax-exempt at its source.

Whereas, the employee’s contribution is counted as part of his/her taxable

income. However, the employee’s contribution is tax deductible under section
80C upto a maximum of Rs. 1.5 lakh per annum. So an employee’s
contribution towards the EPF account is eligible to for tax-exemption but only
under section 80C.
Also, in case you withdraw your EPF fund before 5 years of contributions, then
both employee’s, as well as employer’s share, become taxable.

9. How much percentage is EPF deduction from salary?

Ans. 12% of the employee’s salary goes towards contribution to Provident

Fund. Also, Employee State Insurance Corporation(ESIC) is deducted on gross
salary which is 1.75% from the employee contribution & 4.75% from the
employer contribution.

10. How much EPF amount can be withdrawn?

Ans. EPF can be withdrawn only at the time of retirement or in case of

unemployment and certain emergencies. Full withdrawal can be done after
retirement or unemployment for two months. As per the new rule, EPFO allows
withdrawal of 75% of the EPF corpus after 1 month of unemployment. The
remaining 25% can be transferred to a new EPF account after gaining new
employment.

11. What If someone dies a natural death or due to health related issues.
Will any of his/her family member get the EPF amount?

Ans. In case, if the EPF subscriber expires, the nominee or the legal heir or the
guardian in case of a minor can get the EPF amount. For that he needs to go
claim the EPF money by submitting all required documents like Death
Certificate and EPF Composite Form. Guardian Certificate is also required if it
is claimed by a guardian of a minor other than natural guardian.

12. How to withdraw Employee Provident Fund?

Ans. You need to have an activated UAN and registered mobile number for
withdrawal. Assuming that you have these prerequisites, go to EPF Member’s
Portal and login using UAN. Do check if your documents are verified as KYC in
the ‘Manage’ section. Go to ‘Online Services’ and click on ‘Claim’ from the drop
down menu which displays all your personal details. Then, click on ‘Proceed for
Online Claim’ to claim your withdrawal and select the claim you want to make
under ‘I want to apply for’ like EPF Settlement or EPF Partial Withdrawal.

13. How to claim Employee Provident Fund?

Ans. As explained above, one needs to go to EPF Member’s Portal or e-SEWA

Portal to login using UAN and go to ‘Online Services’ to claim and withdraw the
fund.

Latest News :

Revised EPF Interest Rate for 2020-21: Lowered by 0.15%

The Union Labour Minister Santosh Gangwar announced the new interest
rates for EPF on 3rd March 2020. The interest rate for the scheme has been
revised and lowered by 0.15% for the current financial year. For 2020-21, the
interest rate is 8.50% which is reduced from the earlier 8.65 per cent.

“The EPFO has decided to provide 8.5 per cent interest rate on EPF deposits for
2020-21 in the Central Board of Trustees (CBT) meeting held today”, states
Gangwar.

In contrast to the constant demands from workers about hike in EPF interest
rates, the directors released the new percentage which will give lower interest
on the fund deposits by salaried employees. The economic slowdown and its
negative impact on debt market instruments including government securities
and FDs can be a major reason for the drop in EPF interest rates for the
financial year 2019-20. The retirement body of India invests 15% in equity and
85% in debt instruments implying that the fall in debt investments would have
hampered its income in 2020-21.

Earlier in the year of 2016-17 and 2018-19, the EPFO has given 8.65% rate of
interest to the subscribers. And, it was 8.8% in 2015-16.

Rs. 54,000 Cr to be Distributed as Interest to 6 Cr EPF

Accounts

Labour Ministry notified the interest rate on Employees Provident Fund (EPF)
to be 8.65% for the year 2018-19. Corresponding to this, the interest for the
year will be credited to the accounts of around 6 Crore subscribers for EPFO.
The total amount to be credited to these subscribers will be equal to Rs.54,000
Crore.

The withdrawal claims of EPF for the given year will not be settled at the
interest rate of 8.55%; but rather at the higher rate of 8.65%. The revised
interest rates have been effective from February 22, 2019.

Subscribers can check their PF status online via the following mediums-

1. EPFO website (www.epfindia.gov.in)

2. Umang Application (Download the application from App store/Play store)
3. Missed Call (Number- 011-22901406)
4. SMS Service (SMS EPFOHO <UAN><LAN> to 7738299899)

However, it must be noted that only the users who have registered on UAN
member portal and have activated their UAN number can check their balance
through the online platforms.

Aadhaar Card Necessary for EPF Account Nominees

According to the new rules released by the Employees’ Provident Fund
Organisation (EPFO), submitted the Aadhaar card number of the nominee is
mandatory for e-nomination of your provident fund account. The newly
established e-nomination function on EPFO which not just requires the
subscribes to link their Aadhaar card with the account but also mandates the
submission of Aadhaar card number of the nominee.
Apart from the Aadhaar card number, scanned images, Date of Birth and
mobile number are some of the important details of the nominee/s which
requires to be provided duly. However, the submission of bank details of the
nominee remains optional.

Employees Provident Fund Act Latest Amendments 2019

The government is planning to make amendments in EPF as it has prepared a

draft bill that allows employees to switch money from EPF (Employee Provident
Fund) to NPS (National Pension Scheme). Another proposal is to replace the
existing definition of ‘wage’ (in the EPF Act) with a new one as mentioned in the
Code of Wages, 2019. The new definition of wages is likely to impact the EPF
contribution of those employees whose basic salary is currently less than Rs
15,000.

Amendment 2021;Taxation of Interest

In the Budget 2021, the Finance Minister has proposed to tax the interest
accruing on the employee contribution to the provident fund account (including
voluntary contributions) in excess of Rs 250,000.

This interest would be taxable under the head “Income from other Sources” at
the applicable slab rates based on the method of accounting (accrual or receipt)
followed by the taxpayer on a regular basis. It is expected that this interest
would be subject to tax withholding though the mechanism is to be
announced. The proposed changes would be applicable from the financial year
2021-22 i.e. from 1st April 2021. In the past, interest earned on the said
contribution was not taxable if the contributory period is more than 5 years.

Who would be impacted

The proposed amendment by the government is aimed at rationalising the tax

exemption for the higher salaried group who were earning tax-free income.
Thus, the government believes that such a move would reduce income
disparity. Illustratively, an employee contributing to PF at the rate of 12% on
basic salary exceeding Rs 21 lakh annually would need to offer interest
accrued on employee contribution in excess of Rs 250,000 to tax. As such it is
expected that such a person draws a total salary of about Rs 42 – Rs 50 lakh.

The employees earning below this threshold would not be impacted unless they
make voluntary contributions to provident fund. The employee contributions
continue to be eligible for a deduction under section 80C up to Rs 1.5 lakh
subject to not opting for simplified tax regime. Provident Fund earns an
attractive rate of interest on the outstanding PF balance which is exempt
subject to contributory period is 5 years or more.

Thus, while PF can still be considered as an attractive tax saving investment

option considering the rate of interest, the 100% exemption enjoyed at the time
of withdrawal as well as from a low risk factor, one has now to consider the tax
incidence of this investment in the longer run.