Typically, all salaried individuals contribute at least 12% of their salary to the Employees’ Provident Fund (EPF) account, and their employer matches the contribution. Employees can even voluntarily contribute up to 100% of their salary to EPF, but employers are mandatorily required to only match up to 12%. The contributions made to EPF then compounds at a rate declared by the Employees’ Provident Fund Organization (EPFO) every year. EPF earned an interest of 8.65% during financial year 2018-19.
Not only is the interest that EPF offers usually higher compare to other fixed income instruments, contribution of up to ₹1.5 lakh to your EPF account also qualifies for tax deduction under Section 80C of the Income Tax Act, 1961. The interest accrued is tax free only after five years. If you keep your EPF investment intact till retirement, what you get on retirement is completely exempt from tax. But remember that if you delay withdrawing your EPF corpus, any interest earned on the EPF balance post retirement is taxable.
- The Income Tax Act allows some exemptions on gratuity received on retirement or on termination of employment. The gratuity received by government servants is fully exempt from tax. If gratuity is received from a private organisation, the lower of the following amount is exempt 15 days salary for each completed year of service, or Rs 20 lakh, where employer is covered by the Payment of Gratuity Act, and Rs 10 lakh if the employer is not covered by the Act. Salary includes basic and dearness allowance. Where Payment of Gratuity Act is applicable, the salary is computed on the basis of the last salary drawn, and where the Act is not applicable, it is computed on the basis of average salary for the last 10 months in service.
- Once you resign from the job, retire or get terminated, then the interest you earn from that day to till your withdrawal will be taxable income for you. Even if you retire at 55 years of age and hold the money up to 62 years of age thinking you will earn the interest up to the age of 62 years, will have to pay the tax from whatever interest you earned from 55 years of age to 62 years of age.
- Such interest income will be taxed in the year in which it is accrued. For example, if your age is 50 years and you resigned today. However, you wished to withdraw it in FY 2025-26. Then whatever the interest you earn from today to till FY 2025-26 will be taxed yearly based on the interest amount you earned yearly.
Tax on EPF Post Retirement
Income-Tax Appellate Tribunal (ITAT) changed some misconception in relation to Tax on EPF after resign, retire or terminated. Because earlier it was believed that amount received is a fully exempt tax on EPF after resign, retire or terminated in case of an employee who is in continues service for a period of 5 years or more. Full exemption is also available for employees who not completed 5 years because of his ill health, discontinuance of employer’s business or any other reason which is not in control of the employee. If the account is transferred to the new employer then the previous service from whom the account is transferred is also considered as a service period.
How long your EPF account will earn interest after you resign, retire or terminated?
As per EPFO rules, the retirement age is 55 years. If you do not withdraw the money within 3 years from the attainment of the age of 55 years, then such accounts are called as Inactive EPF accounts.
Interest on Inoperative EPF Accounts up to 58 years of age
Now as per the clarification from Ministry of Labour, your account will fetch the regular interest up to the age of 58 years. Whether you contribute to it or keep it idle, EPFO will credit to such accounts as long as you turn 58 years of age.