Income tax benefits on EPF contributions: New vs Old Tax Regime

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Income tax benefits on EPF contributions: New vs Old Tax Regime

Employer Provident Fund or (EPF) account is where the salaried personnel have to make a contribution of 12% of their salary, which includes their basic pay and dearness allowance. If a taxpayer is opting for new tax regime then, they would have to let go of the deductions which is present in the old regime which includes the deductions in Section 80C.

The new tax regime which was been announced by the Finance Minister in her Union Budget speech, gives taxpayers lower income tax rates but results in giving up approximately 70 deductions and tax exemptions which includes the tax benefit available on employee’s own contribution to EPF.

Impact on EPF – New Regime vs Old Regime

  • As per the current income tax rules, the employer’s contribution in an employee’s EPF account up to 12% remains tax-free, on exceeding the 12% bar the amount becomes taxable. This provision will remain the same in both old as well as new regimes.
  • The employee’s contribution of 12% is eligible for deduction under Section 80C of Income Tax Act. Any taxpayer opting for the new regime will have to forgo of this deduction as this will only be present in the old tax regime.
  • Another rule which was proposed in the Union Budget 2020, was that if an employer’s contribution exceeds Rs 7.5 lakh in a year towards National Pension System (NPS), superannuation fund or EPF, it will be taxable in the hands of the employee. Both old and new tax regimes will be following this norm.

Though there are certain deductions which includes employer contribution on account of employee in NPS under Section 80CCD (2) which still can be availed even if a taxpayer decides to shift to the new tax regime. The specified limits mentioned for Central Government employees is 14% and 10% of the salary for the others.

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