Tax is also levied on money deposited in EPF and NPS

News Patiala 17th August 2022
                Under the Employees Provident Fund Act, 1952, every salaried person has to contribute at the rate of 12 percent to his EPF account. Along with the employees, the employer also contributes to it. Apart from the EPF account, the employer (company) can also contribute to the employee’s NPS account. It is completely voluntary.

Getting equal contribution from employer to EPF and NPS can be attractive to an employee. If the combined contribution in both the accounts exceeds a certain limit. So it can be taxed. Any interest, dividends, etc. earned on this more contribution will also be taxable.

It was announced in the budget for the year 2020. If the employer’s total contribution to EPF, NPS, and Retirement Fund in a financial year is more than Rs 7.5 lakh. Then this more contribution will be taxed by the employee. Apart from this, any interest, dividend, etc. earned on the excess contribution is also taxable. This rule is applicable from April 1, 2020, i.e. from the financial year 2020-21. If you are employed and have recently changed jobs or received assessments in the company, check if the employer’s contribution to EPF and NPS has increased to the extent that you will have to pay tax.

How to check

To know how much your employer has contributed to your EPF and NPS account. You need to see your appointment or evaluation letter. How much money does the employer deposit in your EPF account? This is definitely mentioned in your appointment or appraisal letter. If you have opted for employer NPS contribution under section 80CCD(2) of the Income Tax Act, 1961 in the EPF account. Then such contribution will be mentioned in your appointment or appraisal letter.

Of the 12 percent employer contribution to EPF, only 3.67 percent is deposited in the EPF account, while the remaining 8.33 percent goes to the Employee Pension Scheme (EPS). EPS contribution is calculated at a limit of Rs 15,000. This means an employer can contribute a maximum of Rs 1,250 to EPS and the remaining amount is credited to the EPF account.

How much discount will you get?

If the employer’s contribution (basic + DA) is up to 12 percent, the employee will not have to pay tax. Further, the employee can claim tax exemption under section 80C for his share of the contribution made under EPF, subject to a maximum of Rs 1.5 lakh.

In the case of employer contribution to NPS account, employees can claim tax deduction under income tax laws. In which the maximum deduction is 10 percent of the pay (basic + DA). Note that the contribution made by the employee under section 80CCD(1) is added to section 80C. Hence the total amount of deduction under section 80C including NPS contribution by an employee must not exceed the limit of Rs 1.5 lakh in a financial year.