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Income tax benefits on EPF contributions: New vs existing tax regime

In the new tax regime, the tax benefit available on employee's own contribution to EPF account is impacted.

, ET Online|
Last Updated: Feb 21, 2020, 09.34 PM IST
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There is one tax-break that an individual can avail in the new tax regime.
Salaried employees are required to contribute 12 per cent of their salary (basic plus dearness allowance) to their Employees' Provident Fund (EPF) account. Employer is also required to make a matching contribution to an employee's EPF account.

Budget 2020 has proposed a new tax regime which comes with lower income tax rates but requires an individual to forgo most commonly availed 70 tax-exemptions and deductions. The new tax regime is optional in nature. This means that an individual having no business income can choose between any tax regime every financial year as per his/her convenience.

In the new tax regime the tax benefit available on employee's own contribution to EPF account is impacted.

  • EPF contribution: Existing vs new income tax regime
In the existing tax regime, an employer's contribution up to 12 per cent of an employee's salary is exempted from tax. Any contribution exceeding 12 percent in a financial year will be taxable in the hands of the employee. This will remain same in the proposed new tax regime.

Therefore, in FY 2020-21, even if you opt for new tax regime, you will not be required to pay any tax on your employer's contribution to your EPF account unless it is in excess of 12 per cent in a single fiscal.

Remember, you cannot claim any tax-break on your employer's contribution irrespective of whether you opt for new tax regime or the existing one.

However, for FY 2020-21, if you choose to continue with the existing tax regime, then you are eligible to claim tax-break on the EPF contributions made by you under section 80C of the Income-tax Act.

On the other hand, if you choose to opt for the proposed new tax regime, then you have to forgo 70 tax-exemptions and deductions which include the popular tax-deductions under Section 80C. Therefore, under the new tax regime you will not be able to claim tax benefit for your contribution to EPF account.

  • Tax break that you can claim in new tax regime
In the new tax regime, all is not lost. There is one tax-break that an individual can avail in the new tax regime.

The proposed new tax regime allows a deduction on the employer's contribution to the Tier-I NPS account on behalf of an employee. The deduction can be claimed by an employee under section 80CCD (2) of the Act for maximum of 10 per cent of the total of his/her basic salary plus dearness allowance. In case of government employees, the limit is 14 per cent of their basic salary plus dearness allowance.

The tax benefit under section 80CCD (2) can be opted by an employee if his/her employer agrees to contribute to an employee's Tier-I NPS Account. An employee will have to restructure his/her salary in such a scenario.

  • Tax-exempt limit on employer's contribution
There is one thing that an employee needs to keep in mind irrespective of whether he/she opts for proposed new regime or continues with the existing one. Budget 2020 has proposed a new tax law which restricts the maximum tax-exempt amount that can be contributed by the employer in an employee's EPF account, superannuation fund and NPS account on an aggregate basis.

According to the budget proposal, if an employer's contribution in EPF account, superannuation fund and Tier-I account of NPS on an aggregate basis exceeds Rs 7.5 lakh in a financial year, then the excess amount will be taxed in your, i.e. the employee's hands. Further, any interest, return earned on the excess contribution will be taxable in the hands of the employee too.

Therefore, whether you opt for new tax regime or existing one, make sure your employer's contribution to your EPF account, superannuation fund and/or Tier-I NPS account on aggregate basis is not exceeding Rs 7.5 lakh in FY 2020-21 or else you will be liable to pay tax on the excess amount.

However, subject to the above, interest earned and maturity amount of EPF account continue to remain tax-exempt in the new tax regime as they are in the existing tax regime.
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