Understanding VPF Contributions: Tax Exemption and Interest Calculations Explained

Dear All,

One of our employees is interested in contributing more than the statutory limit, i.e., 12%, towards the PF amount and wishes to contribute up to 25% (VPF) of the total Basic Pay + DA. I require all your help to understand whether this complete 25% will be exempted from tax or if it will only be up to 12%.

The rate of interest, which we get at 9.5% P.A., will be applicable to the accumulated amount from the date of contribution (both Employee & Employer) until withdrawal.

Example Scenario

An employee starts contributing towards PF from the year 2000 and intends to withdraw the money or take a loan against his PF contribution for house purchase or construction. In that case, will the loan interest be calculated on the total amount at the time of loan withdrawal, or only on our contribution amount?

If we accumulate the amount for more than five years, it is tax-exempted for withdrawal. Do we receive the total amount of five years' contributions with 9.5% interest P.A. (meaning 9.5% * 5 = 47.5% interest + Both contributions)?

Please clarify.

Looking forward to positive replies and suggestions.

Regards,
Deepak S

Additional Voluntary Contributions to PF

Additional voluntary contributions enjoy all the benefits of PF, except that the company doesn't contribute an equal amount. However, the interest rate is equal to the rate of interest for PF, and the withdrawal on retirement is tax-free.

Regards,
Kamal

Thank you for your reply. You mentioned that it is exempted at the time of retirement. However, in the case where an employee withdraws the money after five years, including his VPF, will that be exempted from tax?

Regards,
Deepak S

Tax Implications of PF Withdrawal

PF withdrawal is not taxable only if a person has been in continuous service for 5 years. You must have completed a minimum of 5 years of 'continuous' service before making a tax-free withdrawal. If you withdraw from the accumulated PF account within five years of service, the amount will be taxed.

Regards,
Kamal

Thank you all for the support and replies. But Mr. Bhaskar, if you invest in PPF, the amount will be blocked for seven years, and you cannot withdraw the money in full before that time. In PPF, withdrawal is permissible every year from the seventh financial year of the date of opening of the account, of an amount not exceeding 50% of the balance at the end of the 4th preceding year or the year immediately preceding the year of the withdrawal, whichever is lower, less the amount of the loan if any.

However, in EPF, even for the housing loan, we get 95% of the contribution (both Ee and Er), and even in PF, we also get interest-free loans. But in PPF, it will be with interest to be repaid. So, for a person looking for the money after five years, they would definitely go for the VPF. This is as per my understanding. Please correct me if I am wrong.

Once again, I thank all for their replies and suggestions.

Regards,
Deepak S

A person can enjoy tax exemption only on the statutory limit, i.e., 12%. Any contribution more than this will be taxable.

Regards

Clarification on PF Contribution and Tax Exemption

Adding to the above comments, we still need more clarity for further actions. The contribution of PF, both from the employee and employer, is exempted from tax. Whether this contribution is limited to 1 lakh under Section 80C or if it will be treated separately remains unclear.

For example, if an employee's basic salary is ₹1,00,000, then the PF contribution of 12% will be ₹1,44,000 per annum, whereas under Section 80C, it is exempted up to 1 Lakh. So, is the remaining amount of ₹20,000 taxable or exempted?

If the total contribution of the PF amount is completely exempted, is there any document available for the same?

Please clarify.

Regards,
Deepak S