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Provident Fund Exemption From The Income Tax Section

Provident Fund Exemption From The Income Tax Section (2023)

If you are an employee with a salary, the Employee Provident Fund (EPF) is a retirement benefits scheme for you. The Employees Provident Fund Organization (EPFO) manages this scheme. This scheme provides social security and retirement benefits.

 Every organization with 20 or more employees must register under the EPFO. Some organizations with fewer than 20 employees can obtain EPF registration voluntarily. This scheme helps you for a peaceful and hassle-free retirement life.

You should contribute to EPF 12% on your basic salary and the dearness allowance. Your PF amount is tax-free. While filing your returns, you can avail of a PF deduction which helps to reduce your tax. 

The Income Tax Act has provided Section 10, in which you can claim a Provident Fund Exemption From The Income Tax Section.  

Section 80C also deals with the deduction of your PF amount.

What are the new PF deduction rules?

EPFO is making new changes for PF deduction in Income Tax. The current PF account will divide into two parts from April 1, 2022. If the contribution increases the suggested limit, the interest on that account comes under taxable income.

Finance Minister Nirmala Sitharaman, during her Budget Speech 2022, mentioned that the interest on contribution towards EPF account of over Rs 2.5Lakh per annum is taxable from April 1, 2022. 

For Government employees, this limit of tax-free contribution to PF account is up to Rs 5 Lakh per annum.

The new PF deduction rules are summed up as:

  1. The current PF account gets separated into taxable and non-taxable contribution accounts.
  2. New PF rules come into effect on April 1, 2022.
  3. A new section 9D is included in the Income Tax Act, to introduce a new tax on PF income from employee contributions of over Rs.2.5 Lakhs per annum.
  4. These two accounts are formed in the existing PF account to calculate taxable interest.

How much PF is tax-free?

You should contribute 12% of your basic salary and Dearness allowance to your PF account. 

Interest on your contribution to your EPF account above Rs 2.5 lakh during the financial year is taxable. This interest is also subject to TDS. 

If your annual contribution towards your PF account is less than Rs 2.5 lakh your PF is tax-free, and you are not liable for any taxes under the PF section.

Under which section PF is exempt?

Your contributions to the EPF account are deductible under Section 80C.

If your contribution is less than 2.5Lakhs per annum to your PF account, you can claim a deduction under Section 80C and that amount is not taxable.

Also, sections 10(11) and 10(12) of the Income Tax Act exempted income received from Provident Fund. The exemption limit above which interest would be taxable is Rs.2.5Lakhs.

However, the contribution made by the employer is not taxable under any circumstances.    

 Where can I fill the PF deduction in ITR?

Your PF amount is liable for deduction under the Income Tax Act. 

While filing your ITR, you can use Sections 10(11) and 10(12) of the Income Tax Act to get an exemption on the amount added to the provident fund.

Also, Section 80C deals with the deduction of provident fund amount and interest obtained through it.

FAQ:  Provident fund exemption from the income tax section

1. Is PF above 2.5 lakhs taxable?

Yes, if your contribution to your PF account is over ₹ 2.5 lakh per annum, the interest on that amount is taxable.

2. What is the limit for the deduction of PF? 

If your salary is less than Rs.15000 per month, including (basic salary and Dearness Allowance), you should open an EPF account with your employer. If you draw a salary above this limit, it is possible for you also to open an EPF account voluntarily with the help of your employer.

This is done for your better retirement life as you could hold your entire PF amount at the time of your retirement.

So, the maximum limit for deduction of PF is Rs.15000 per month if you are a salaried person.

3. What does it mean if you are tax-exempt?

Tax exemption means you have the right to have some or all of your income exempt from the government’s taxation. Many taxpayers are eligible for quite a several exemptions that are used to lower their taxable income, while some are fully free from paying taxes. 

The Indian government offers many tax exemptions to support investments. For example, it grants an exemption on insurance premiums to encourage more people to buy life insurance. Some of the other incomes that are exempt are agricultural income, pension, allowances, etc. You can also avail of a deduction of Tax at Source.

Section 10(11) and 10(12) comes under the exemption for your Provident Fund Amount and the interest on that amount.

4. What are the pros and cons of filing exempt?

Tax exemption reduces your total taxable income. Thus this saves a lot of your hard-earned money from going away as tax.

However, a drawback of the tax exemption includes the inability to divide profits among members as the total income is not taxable.

Bottom line

Thus we come to the end of this article and you might get aware of the working of your Provident Fund Account and the income you obtain through it. The interest from your contribution to PF Account is taxable if your contribution exceeds Rs.2.5Lakhs. Provident Fund Exemption From The Income Tax Section is possible and the ways for the same are discussed here briefly.

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