Income Tax benefits on EPF contribution in New Tax Regime

Income Tax benefits on EPF contribution in New Tax Regime

Income tax benefits on EPF contribution 

New EPF vs. old EPF Contribution

EPF account is where salaried personnel have to make a contribution of 12% of their salary which includes dearness allowances and their basic pay. If the taxpayer is opting for a new tax regime then, they would have to let go off the deductions which are present in the old regime which includes the deduction in section 80C.

Budget 2020

It has proposed a new tax regime that comes with lower income tax rates but requires an individual to forgo most commonly availed 70 tax exemptions and deductions.
This means that an individual having no commercial income can choose between any tax regimes every fiscal year as per his or her expediency.


EPF contribution 

In the existing tax regime, an employer contribution up to 12% of employee’s salary is exempted from tax. Any contribution exceeding 12% in any financial year will be taxable in the hands of the employee. This will remain the same in the proposed new tax regime.

Therefore in the financial year 2020-2021, even if someone opts for new tax regime one will not be required to pay any tax on your employer’s contribution to EPF account unless it is in excess of 12% in single fiscal. However for the financial year 2020-2021, if someone chooses to continue with the existing tax regime, then he or she will be eligible to claim tax break on the EPF contribution made under section 80C of the income tax act. 

On the other hand, if someone opts for the proposed new tax regime, then he or she has to forgo 70 tax exemptions and deductions which include the popular tax deductions under section 80C. Though under the new tax regime one will not be able to claim tax benefit for contributing to the EPF account.

A tax break that can be claimed in new tax regime

There is one tax break that an individual can avail of in the new tax regime. The proposed tax regime allows a deduction on the employer’s contribution to the tier-1 NPS account on behalf of an employee. The deduction can be claimed by an employee under section 80CCD (2) of the act for a maximum of 10% (14% in case of government employee) of the total his/ her basic salary plus dearness allowances. The tax benefit under section 80CCD (2) can be opted by an employee if his/ her employer agrees to contribute to an employee tier 1 NPS account.

Tax-exempt limit on employer’s contribution

The new budget has proposed a new tax regime that restricts the maximum tax-exempt amount that can be contributed by the employer in the employee 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 1 account of NPS on an aggregate basis exceed 7.5 lac in a financial year, then the excess amount will be taxed in employee’s hands. Therefore,  whether someone opts for a new tax regime or existing one, make sure that his or her employer’s contribution to EPF account, superannuation fund, tier 1 NPS account on the aggregate basis is not exceeding 7.5 lac in the financial year 2020-2021 or else will be liable to pay tax. 




eStartIndia Team

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