Understanding EPF Deductions: How Much Is Really Tax-Exempt for Employees?

Hi Everyone,

Our company provides the facility of Provident Fund to employees. For those to whom it is applicable, the company provides contributory PF. However, for those to whom it is not applicable, the company provides EPF deduction with the entire deduction being borne by the employee.

Now, my question is, does the employee get the full amount deducted from his/her salary as exempt from Income Tax, or do we need to break it up so that he gets tax exemption only for the 12% that is supposed to be the employee's contribution to EPF?

Kindly provide me with an answer to this query at the earliest.

Regards,
Gaurang S

Hi,

Because here, the employee is not under the limit of mandatory PF deductions, so the employee is voluntarily contributing towards PF at 12%, thus he'll receive benefits only for the same.

Warm regards, Umesh Chaudhary (welcomeumesh@yahoo.com)

Hi Umesh,

Thank you for your reply. If the employee gets a benefit for only 12%, what about the other 12% that has been deposited in his PF account? If the employee does not get a tax benefit on this 12%, why should he/she have this amount deducted except for considering it as savings? Can you please give me an idea about that?

Regards, Gaurang S

Hi,

The 12% part is also exempted in IT, but who is contributing 12%? It's his employer. Thus, the employer will be taking benefit of this. When we file an income tax return, we show our income and then deduct our savings in the form of PF, etc. However, we only deduct our share because we saved it at our end. Regarding the employer's contribution, the employer will be getting the benefit.

I hope it's clear.

Warm regards,
Umesh Chaudhary
welcomeumesh@yahoo.com

Umesh,

Thanks again for the clarification. However, my question still stands. The employer is not contributing anything to PF; the entire contribution is being made by the employee as his salary is beyond the PF limit of Rs. 6500/-. So, in this case, who gets the benefit of the 12% additional being contributed by the employee? The employer can't possibly claim the benefit because there is no contribution from their end. This is an issue that has me stumped.

Regards,
Gaurang

Hi,

Don't get bold... lol... Actually, the benefit is given only to the contributor. Here, only the employee is contributing towards his EPF account from his monthly income. Therefore, only he will be getting the benefit while filing the ITR.

Also, please clarify for me, what was the last pay of this employee... Was it less than 6500 earlier?

Warm regards,
Umesh Chaudhary
(welcomeumesh@yahoo.com)

Hi Umesh,

Not trying to be bold at all, mate :oops: ; really sorry if you felt so. I was honestly thanking you for your help.

As for the ITR part, I am now much clearer about the applicability.

Regarding the employee, yes, he was earlier below the 6500 mark and then got a raise. Since our company has a policy of contributory PF only for employees below the 6500 level, we offered him the alternative that he can continue to receive PF benefits by contributing the full amount himself.

This situation led to all this confusion :P

Thanks again.

Regards, Gaurang

Dear Gaurang,

The income tax benefits accrue to the party contributing to PF, whether contributory, general, or voluntary. In excess of the limit of Rs 6,500/-, the benefit can only be availed by the employee who is voluntarily contributing to PF at his own behest, being out of EPF & Misc. Provisions Act coverage. The employer, in such a case, gets no benefits under the IT Act.

Under Section 80C of the Income Tax Act, you can reduce your total income by up to Rs 100,000 by making specified investments. PF is one of them.

Hope this clarifies your queries.

Rahul Kumar

Dear Gaurang,

If the employee was drawing a salary less than Rs. 6500 and at present his salary is more than Rs. 6500, as per the EPF regulations, both the employer and employee will continue to contribute to EPF. The employee will contribute 12%, and in the same way, the employer also needs to contribute. PF has only a forward direction; once one starts contributing towards it, they need to contribute at all times unless they resign from the job.

I hope it's clear. If your company is not contributing towards EPF, you are at fault.

Warm regards,
Umesh Chaudhary
umesh.chaudhary@ril.com

Hi Umesh,

Phew! Legalities can be so confusing. So, the company needs to continue contributing towards the employee's PF even if he/she is above the Rs. 6500 mark now. Guess I need to make certain changes in my company's policies :P.

Gaurang

Hi,

Yes, Gaurang, I am more than 100% sure about this. PF will be contributed by both, namely the employee and the employer, even if the basic pay of the employee crosses the restricted band of Rs. 6,500.00 per month.

Warm regards,
Umesh Chaudhary
welcomeumesh@yahoo.com

Ok Umesh, thanks. I have already started making the necessary adjustments. Your guidance has really been helpful.

Hope I can disturb you again when I need help :D

Gaurang