EPF | NPS: Your employer’s EPF, NPS contribution can be taxable in your hands: Here’s how to check if it is

Under the Employees’ Provident Funds and Miscellaneous Provision Act, 1952, an employee makes a mandatory contribution at the rate of 12% to their EPF account and the employer will have to match this contribution. An employer is also allowed to make contributions into an employee’s NPS account, and this is entirely voluntary.

However, do note that if the employer’s contribution to the EPF, NPS account (combined) exceeds a specified limit, then the excess will be taxable in the hands of an employee. Further, any interest, dividend etc. earned on the excess contribution will be taxable as well.

This amendment was announced in Budget 2020. As per the announcement made, if an employer’s total contribution to the EPF, NPS and superannuation fund exceeds Rs 7.5 lakh in a financial year, then the excess contribution will be taxable in the hands of an employee. Further, any interest, dividend etc. earned on the excess contribution is taxable as well. This income tax rule is effective from April 1, 2020, i.e., from FY 2020-21.

Hence, post the appraisal season it’s important to check if your employer’s contribution to EPF and NPS will become taxable in your hands.

How to check if the employer EPF, NPS contribution is taxable or not

To know how much your employer has contributed to your EPF and NPS account, one needs to check his/her appointment or appraisal letter.

CA Ruchika Bhagat, MD, Neeraj Bhagat & Co – a Chartered Accountant firm says, “Your appointment or appraisal letter mentions your employer contribution to your EPF account. If you have opted for employer NPS contribution under Section 80 CCD (2) of the Income-tax Act, 1961, then such contribution will be mentioned on your appointment or appraisal letter as well.”

Things to keep in mind

It is important to note that an employer’s contribution is divided into two parts. Out of the 12% employer’s contribution to EPF, only 3.67% is deposited to the EPF account. The balance 8.33% is the contribution towards Employees’ Pension Scheme (EPS) account. Further, note that the EPS contribution is calculated on the threshold of Rs 15,000. This means that an employer can contribute maximum Rs 1,250 towards EPS and the balance is deposited into the EPF account.

Now, the question is will the EPS contribution be taken into account while calculating the taxable portion of EPF?

“The income tax law does not differentiate between the EPF and EPS contribution. Hence, the whole EPF contribution made by the employer (as mentioned on the appointment/appraisal letter) to the EPF account will be taken into account to determine whether the contribution exceeds the specified level,” explains Bhagat.

She further mentions, “Employer’s contribution to EPF account is not taxable in the hands of the employees, provided contribution made is up to 12% of the salary (Basic + DA). If the employer’s contribution exceeds the threshold limit, then it will be taxable as well. Further, employee can also claim tax benefit u/s 80C for his share of contribution made under EPF, subject to maximum of Rs 1.5 lakh.”

In case of employer’s contribution to the NPS account, an employee can claim a tax deduction under the income tax laws. The maximum deduction that can be claimed under section 80CCD(2) is 10% of the salary (Basic + DA). This tax deduction is over and above the section 80C deduction of Rs 1.5 lakh and section 80CCD (1b) of Rs 50,000. However, an employee’s contribution under section 80CCD(1) is clubbed with section 80C, as a result, the total amount of deduction under section 80C including NPS contribution by an employee can not be more than Rs 1.5 lakh in a financial year.

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