Those who say EPF is not taxable, please read the following:
Taxability of EPF
Rule 9 (1) of Part A of Schedule IV provides that when an employee does not satisfy any of the conditions laid down in Rule 8, the accumulated balance paid from the recognized provident fund shall be included in his total income. The tax payable on such accumulated balance shall be the differential tax calculated for each of the years concerned as if the fund had not been a recognized provident fund.
For the calculation of tax, therefore, the accumulated balance being paid has to be split up into:
• Employee's own contribution year by year;
• Accumulated Company's contribution;
• Total interest credited on the employee's contribution;
• Total interest credited on the Company's contribution.
Since the fund is to be treated as an unrecognized fund, contributions made by the employee from year to year would not be eligible for rebate under Section 88. The company's contributions and interest credited on employees' and company's contributions each year are, however, to be ignored as the employee does not receive them year to year. So, in respect of the earlier years, the tax on the employee's salary has to be reworked each year without giving a rebate under Section 88 on his own contribution. The amount by which the total tax so calculated for earlier years exceeds the total tax previously deducted and paid for such years shall be the additional tax payable in respect of accumulated employee's own contributions.
In the year the accumulated balance is due, the accumulated company's contribution and interest thereon that is being paid are to be included in the total income of the employee of that year under salary income in view of Section 17(3)(ii), which defines the expression “profits in lieu of salary” to include the share of the company's contribution and interest thereon not exempt under Section 10(12) of the Income Tax Act. Employee's own contribution and interest thereon are specifically excluded from the expression “profit in lieu of salary” in Section 17(3)(ii). From this, it follows that the interest on the employee's contribution cannot be considered as salary. The interest on the employee's contribution is, however, undoubtedly an income as defined under Section 2(24), and the Supreme Court in the case CIT v/s G. Hyatt (80 ITR 177) has held that such interest is taxable as “income from other sources.”
PLEASE CORRECT IF BEYOND LEGAL.
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