Are your contribution to EPF, NPS taxable?

 Any amount exceeding Rs. 7.50 lakh contributed by the employer to approved provident fund accounts taken together shall be considered as perquisite in the hands of the employee.

An employer’s contribution to the provident fund account of his employee used to be totally tax-free in the employee’s hands without any monetary cap as long as it did not surpass 12 percent of the minimum wage and dearness allowance.

Whether contribution to VPF is also taken into account for arriving at ₹7.5 lakh per year figure?

However, the Finance Act, 2020 introduced an absolute limit of 7.50 lakh on the aggregate of contributions made by an employee to recognized provident fund, NPS (National Pension System) scheme, and an authorized superannuation fund taken together in one year.

employee provident fund

Any amount exceeding Rs. 7.50 lakh paid by the employer to these accounts taken together shall be considered as perquisite in the employee’s hands and shall be included in his salary and taxed at the slab rates. The interest or income earned in spite of such an excess contribution to all three accounts is often included in the employee’s perquisite value year after year.

Contribution to VPF(Voluntary Provident Fund) is considered as amount contributed by Employee to his own provident fund account and not Employer. Therefore the authorized limit shall not be considered when reaching the above limit of Rs. 7.50 lakh.

Epf

The question of adding the interest earned in respect of the contribution made by the previous employer in the above-mentioned limit of 7.50 lakh does not occur as this can not be regarded as an employer’s contribution.

Interest paid in respect of the contribution made by the former employer as well as the new employer is absolutely tax-free in your hands as long as you are working in one company or another. These will become taxable after your retirement to the extent not withdrawn by you.

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NPS Tier II account income tax benefits

Following last month’s notification by the Government of the National Pension System (NPS) Tier-II account is eligible for tax deduction under Section 80C, detailed guidance has been provided to the Pension Fund Regulatory and Development Authority or the PFRDA. Previously, the NPS Tier-II account had no lock-in, but now these tax-deductible contributions by government employees would be locked in for three years.

Here are 10 things to know about NPS Tier II income tax saver scheme:

1. Only central government employees are entitled to obtain income tax benefits under the National Pension System Tier II program. Private sector employees contributions to the NPS Tier II account will remain free from lock-in, but will not get tax deductions.

2. The contribution of the central government employee to NPS Tier-II for the deduction of income tax under Section 80C (up to 1.5 lakh) per year will be having a lock-in for a period of 3 years.

3. The central government employee who are seeking to make use of this tax advantage must have threeNational Pension Systemaccounts: Tier-I (which is a compulsory account), Tier-II (optional and freely withdrawable) and Tier-II (optional account with Section 80C advantage but with a three-year lock-in).

national pension schene

4. The NPS Tier II Tax Savings Account does not give any any investment choice to the users

5. The asset class allocation mix of equity (10 per cent to 25 per cent), debt (up to 90 per cent) and cash / money market / liquid funds (up to 5 per cent).

6. During the lock-in duration of three years, no withdrawal will be permitted. However, in the event of the death of the subscriber, the corpus may be withdrawn by the nominee / legal heir.

Tier 1 Tier 2

7. In the event of the closure of the Tier-1 National Pension System account due to the exit from the NPS, further contributions to the National Pension System Tier II tax-saving scheme will not be permitted. The NPS Tier II tax saver scheme will be terminated after the lock-in period has been completed.

8. Subscriber of NPS Tier II tax-saving scheme can choose any pension fund.

9. However, the subscriber will be allowed to have a maximum of three different pension funds under the NPS Tier II tax savings scheme.

10. The adjustment in the pension fund will only be permitted after the lock-in period. Such reinvestments will be treated as fresh investments and will be locked in for another three years.

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