Taxation of EPF, Superannuation, Leave Encashment, Gratuity, NPS

Learn about the taxation of EPF, Superannuation, Leave Encashment, Gratuity, NPS, and PPF under the Income Tax Act, 1961. Explore eligibility criteria, taxability, exemptions, and rules for withdrawal, ensuring comprehensive knowledge for better financial planning.

Article explains Taxation of EPF, Superannuation, Leave Encashment, Gratuity, National Pension Scheme (NPS) and PPF under Income Tax Act, 1961. It explains Eligibility for EPF Withdrawal, EPF Component, Taxability on withdrawal of EPF and Exemptions on gratuity received by private sector employees.

Employee Provident Fund:

1. Eligibility for EPF Withdrawal

An employee must fulfil the following conditions to withdraw the entire EPF funds.

• The entire EPF amount can be withdrawn upon retirement. The retirement age fixed by the EPFO is 55 years.
• An employee can withdraw 90% of the EPF funds one year before retirement after attaining 54 years.
• An employee can withdraw 75% of the EPF amount after one month of unemployment. The remaining money will be transferred to the PF account of the new job.
• An employee can withdraw the entire EPF amount after two months of unemployment.
• EPF amount can be withdrawn without the employer’s consent by obtaining approval online when the Aadhar is linked with the UAN, and the employer has approved it.

2. EPF Component:

• Your EPF pay-out has 3 components:
• Your contribution/Employee’s contribution – This is the amount contributed by you to your EPF. This portion of your withdrawal is not taxable. However, if you have claimed a deduction under section 80C on your contribution in earlier years, you may have to pay additional tax as if 80C was not claimed by you for those years.
• Interest on your/employee’s contribution- This portion is taxed as income from other sources.
• Employer’s contribution and interest on employer’s contribution – Employer’s contribution and interest on it is fully taxable. It is taxed under the head salary in your tax return. When TDS is deducted from it, you are likely to see an entry under salary TDS in your Form 26AS for it.

3. Taxability on withdrawal of EPF

S No.	Scenario	Taxability
1	Withdrawal <50k and before completion of 5 years	No TDS. But, need to pay tax on such withdrawals.
2	Withdrawal >50k and before completion of 5 years	TDS @ 10% if PAN is furnished; No TDS in case Form 15G/15H is furnished
3	Withdrawal after 5 years of continuous service	No TDS. Further, such withdrawal is exempt from tax
4	Transfer of PF from one account to another upon a change of job	No TDS. Further, such withdrawal is exempt from tax
5	Before completion of 5 continuous years of service/ ill health/ reasons for withdrawal are beyond the employee’s control	No TDS. Further, such withdrawal is exempt from tax

Superannuation

1. Employee’s contribution to the approved superannuation fund is deductible under Section 80C subject to an overall limit of Rs 150,000.

2. Employer’s contribution of up to Rs 1.5 lakh in respect of an employee is exempt. However, if the contribution exceeds Rs 1.5 lakh, the amount in excess will be taxable in the hands of the employee as a perquisite.

3. At the time of change of job: Amount withdrawn if any by the employee is taxable under the head “Income from other sources”

4. On retirement: 1/3 of the commuted fund is fully exempt from tax and the remaining amount if transferred to a pension plan is exempt and if the amount is withdrawn, it is taxable in the hands of the employee.

5. On death or injury: Any benefit received from a superannuation fund is tax-free.

6. Interest from a superannuation fund is exempt.

Gratuity

• Gratuity is a monetary benefit given by the employer, but not paid as part of the regular monthly salary.
• The provisions of gratuity are governed by the Payment of Gratuity Act, of 1972.
• Every individual – working in a factory, mine, oil field, port, railways, plantation, shops & establishments, or educational institution having 10 or more employees on any day in the preceding 12 months – is entitled to gratuity.
• Once the Act becomes applicable to an employer, even if the number of employees goes below 10, gratuity is still applicable.
• It is given on the occurrence of any of the following events:

1. On superannuation (means an employee who attains the age of retirement is said to be in superannuation)

2. On retirement or resignation

3. On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee) It is mandatory for the employee to have completed a minimum of five years in service to be able to receive gratuity. It is not available for interns or temporary employees.

Exemptions on gratuity received by private sector employees

• The income tax exemption on gratuity given to employees working in the private sector depends on whether they are covered under the Payment of Gratuity Act or not.

1. When private sector employees are covered under the Act

• The income tax exemption on gratuity received is the least of the following three:

1. Gratuity amount of Rs 20 lakhs u/s 10(10) of the Income Tax Act.

2. Last 15 days’ salary x number of years of employment

3. Actual gratuity received

2. When private sector employees are not covered under the Act

•  The income tax exemption on gratuity received is the least of the following three:

1. A gratuity of Rs 10 lakh

2. Last 10 months’ average salary x number of years of employment

3. Actual gratuity received

• Points to note:
• The number of years in service is rounded off to the nearest full year
• Gratuity paid to government employees is fully exempt from tax. It is applicable to employees of the central government, state government, defence sector, members of civil services and other local authorities
• Even when an organization declares bankruptcy, the employees must still get gratuities, and no court ruling can prevent an employee from receiving gratuities.

Leave Encashment

• Leave encashment received by employees is taxable based on when it is received.
• Leave encashed while at the time of job: The amount becomes fully taxable and forms part of ‘Income from Salary’. However, you can claim some tax benefits under Section 89 of the Income Tax Act. You must fill up form-10E to claim the tax relief for leave encashment.
• Leave encashed at the time of retirement or resignation
• The amount received by the Govt Employees: Fully Exempt u/s 10(10AA)(i)
• The amount received by the Non-Govt Employees: Lower is Exempt u/s 10(10AA)(ii)
• Rs 25,00,000 (For all employers cumulatively)
• Actual amount received
• Immediately last 10 Months Average salary * 10 Months
• ## Salary per day (Based on 10 Months Average salary) * Unutilised leave (max 30 days)
• ## Salary for this purpose includes Basic Salary + DA and Commission based on a fixed percentage of turnover.

National Pension Scheme (NPS)

Nature	Types	Premature Withdrawal	Partial Withdrawal	Maturity Withdrawal
Withdrawal (When)		Can be made only after completion of three years from the date of entry in the NPS	NA	NA
Withdrawal (Amount)		Can be withdrawn only 20% of your corpus at the time of premature exist	Can be withdrawn up to 25% of your total contribution (not on the total NPS account balance)	Can be withdrawn up to 60% of the total NPS account balance which is tax-free.
Remaining (Amount)		The remaining 80% must be used to buy an annuity	NA	The remaining 40% must be used to buy an annuity
Taxability		Both the 20% withdrawal and the annuity are taxable	These partial withdrawals are completely tax-free	Up to 60% of your corpus is tax-free and your monthly pension is taxable at normal.
Withdrawal (Times)		Premature withdrawals can be made up only once.	Partial withdrawals can be made up only 3 times.	Maturity withdrawals can be made up only once.

Public Provident Fund

• The withdrawals from PPF, either partial or in whole are exempt from taxation under Section 80C of the Income Tax Act, 1961.
• Public Provident Funds come under the Exempt-Exempt-Exempt category of investments.