EPFO and Private PF Trusts – Everything You Need to Know About Tax Implications on Withdrawal and Interest Payments

EPF or Employees’ Provident Fund is a mandatory savings scheme for salaried individuals in India. On the other hand, many private firms have their own private trust known as Private PF Trusts (PPTs) instead of EPFO. In this article, we will discuss the tax implications on withdrawal and interest payments for both – EPF and PPTs.

Is there any ban on Private PF Trusts by EPFO?

The title of this article suggests that there might be a ban on PPTs. However, it is entirely false. There is no such ban levied by EPFO on the functioning of PPTs. In fact, the EPFO allows private sector establishments to manage their own PF trusts. Hence, companies which have PPTs are equally entitled to all the benefits that an EPF account holder gets.

Withdrawal from EPF and Private PF Trusts

Both EPF and PPTs can be withdrawn prematurely in case of major expenses such as medical emergencies, house construction, or children’s education. However, withdrawals from an EPF account and PPT will attract different tax implications.

In the case of EPF, withdrawals made before five years of continuous service with the same employer will be taxed at a flat rate of 10%. However, if the withdrawals are made after five years of continuous service, then they are tax-free. It is important to note that if the withdrawal amount exceeds INR 50,000 in a financial year, then TDS (Tax Deducted at Source) will be deducted by the EPFO.

On the other hand, PPTs attract tax at the slab rate applicable to an individual. For instance, withdrawals made from a PPT will be tax-free only if the employee has completed five years of continuous service and the balance transferred is within the prescribed limit. If the withdrawal amount exceeds the prescribed limit, then it will be taxed as per the slab rate applicable.

Interest Payments on EPF and Private PF Trusts

The interest on both EPF and PPTs is tax-free at the time of accumulation. The current interest rate for EPF and PPT is 8.5% per annum. This interest rate is revised every year by the EPFO and PPT trustees, respectively.

However, interest payment on premature withdrawals attracts different tax implications for EPF and PPTs. In the case of EPF, if an individual withdraws before five years of continuous service, then the interest paid on the accumulated balance will be taxable. On the other hand, if an employee withdraws from PPTs, then the interest paid on the accumulated balance will be taxed as per the slab rate applicable to the individual.

Conclusion

In conclusion, private sector establishments can opt for PPTs instead of EPF. There is no ban levied by EPFO on PPTs. However, it is important to note that EPF and PPTs attract different tax implications on withdrawal and interest payment. Withdrawals from EPF before five years of continuous service are taxed at a flat rate of 10%, while PPTs withdrawals are taxed as per the slab rate applicable to the individual. Furthermore, the interest paid on EPF is taxable if withdrawn before five years of continuous service. However, the interest on PPTs is tax-free only if within the prescribed limit and after completion of five years of service.