The Employees’ Provident Fund (EPF) is one of the most popular retirement savings schemes in India, offering both financial security and tax benefits. Mandated by the Employees’ Provident Fund Organisation (EPFO), this scheme applies to salaried employees working in organisations with 20 or more employees. While EPF primarily serves as a long-term savings plan, it also provides significant tax advantages under the Income Tax Act, 1961.

Tax benefits on EPF contributions

1) Employee’s contribution (Deduction under Section 80C)

Employees contribute 12% of their basic salary and dearness allowance towards EPF every month. This contribution qualifies for a deduction under Section 80C, up to a limit of Rs 1.5 lakh in a financial year. This helps reduce taxable income, lowering the overall tax liability.

2) Employer’s contribution 

The employer contributes 12% of the employee’s basic salary and dearness allowance to EPF, which is exempt.

3) Tax on EPF interest earnings

Interest earned up to 9.5% on EPF is tax-free, but any interest beyond this limit is added to the employee’s taxable salary income.

Also, for employee contributions to EPF more than Rs 2.5 lakh per year (Rs 5 lakh for government employees), the interest earned on the excess amount is taxable.

Tax on EPF withdrawals

  • Withdrawal before 5 years: Withdrawing your EPF balance before completing five years of continuous service attracts TDS. No TDS is deducted if the withdrawal amount is below Rs 50,000. Your total service duration, including previous employment, is considered when calculating the five-year period. If you transfer your EPF balance to a new employer and your total employment reaches five years or more, no TDS applies. Keep in mind that the five-year rule is strict — falling short by even a few days can result in tax deductions.

  • Withdrawal after 5 years: If you withdraw your EPF balance after completing five years of continuous service, the entire amount is tax-free.

TDS on EPF withdrawals

If you withdraw your EPF balance before completing five years of continuous service, TDS is deducted at 10% if the amount exceeds Rs 50,000. To avoid a higher deduction, ensure your PAN is provided at the time of withdrawal. If PAN is not submitted, TDS will be deducted at 20%.

. Read more on Personal Finance by NDTV Profit.EPF withdrawals are taxed differently depending on various factors, so understanding the rules can help you avoid unexpected taxes and manage your finances better.  Read MorePersonal Finance 

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