Employer Contribution to Recognised Provident Fund (RPF) – Tax Rules & Limits

Under the Employees’ Provident Fund (EPF) scheme, employers are required to contribute to a Recognised Provident Fund (RPF) for eligible employees. The tax treatment of these contributions depends on compliance with EPF rules and salary thresholds. Below is a detailed breakdown:

1. Employer Contribution Rate

• Mandatory Contribution:
  • 12% of employee’s salary(Basic + Dearness Allowance + Retaining Allowance, if any).
  • For employees earning ≤ ₹15,000/month, the entire 12% is allocated as follows:
    • 67% to EPF
    • 33% to EPS (Employee Pension Scheme)(capped at ₹1,250/month).
  • For employees earning > ₹15,000/month:
    • 67% to EPF
    • 33% of ₹15,000 (₹1,250) to EPS
    • Remaining amount (8.33% of salary above ₹15,000) to EPF.

2. Tax Treatment of Employer Contributions

Example:

• Employee’s salary (Basic + DA) = ₹50,000/month
• Employer’s contribution = 12% of ₹50,000 = ₹6,000
  • Exempt amount= ₹6,000 (since ≤ 12% of salary)
• If employer contributes 15% (₹7,500):
  • Taxable perquisite= ₹7,500 – ₹6,000 = ₹1,500/month

3. Key Amendments (Post-2021)

1. Tax on High Contributions (Section 80C Limit):
   • If employee + employer contribution > ₹2.5 lakh/year, interest on the excess amount is taxable.
   • If employer does not contribute, the threshold increases to ₹5 lakh/year.
2. Withdrawal Before 5 Years:
   • Employer’s contribution + interest becomes taxable if withdrawn before 5 years of continuous service.

4. Compliance & Reporting

• Employer’s Responsibility:
  • Deposit contributions by the 15th of the next month.
  • Report taxable perquisites in Form 16.
• Employee’s Responsibility:
  • Declare taxable perquisites in ITR under “Income from Salaries”

(A)  Interest Is Credited to Employees’ Recognised Provident Fund (RPF) – Tax Rules & Limits

Here’s a detailed explanation of how interest is credited to employees’ Recognised Provident Fund (RPF) under the Income Tax Act, 1961, including tax implications and calculation methods:

1. Interest Rate on RPF

• The current EPF interest rate for FY 2024-25 is 8.25%, as approved by the Central Government.
• Interest is calculated monthlybased on the running balance but credited annually at the end of the financial year (March 31).

2. Tax Treatment of RPF Interest

Non-Taxable Interest

• Interest is fully tax-exemptif:
  • Employee contributions do not exceed ₹2.5 lakh/year(₹5 lakh for govt. employees where the employer does not contribute).
  • Employer contributions (including RPF, NPS, Superannuation) do not exceed ₹7.5 lakh/year.

Taxable Interest

• If contributions exceed the above limits:
  • Interest on the excess amountis taxable under “Income from Other Sources”.
  • TDS @10%applies under Section 194A if interest exceeds ₹5,000/year (20% if PAN not linked).

3. Key Conditions for RPF Interest Exemption

• Recognition by IT Dept: The fund must be approved under Part A of the Fourth Scheduleof the Income Tax Act .
• Contribution Limits:
  • Employer: Max 12% of salary(Basic + DA) .
  • Employee: Tax-free up to ₹2.5 lakh/year .
• Withdrawal Rules:
  • Tax-free if withdrawn after 5 yearsof continuous service .
  • Taxable if withdrawn earlier(TDS applies) .

4. Practical Example

• Employee A(Private sector, Basic + DA = ₹50,000/month):
  • Employee contribution: ₹6,000/month (12%) → ₹72,000/year(non-taxable as <₹2.5 lakh).
  • Employer contribution: ₹6,000/month (₹1,250 to EPS, ₹4,750 to RPF) → ₹57,000/year(non-taxable as <₹7.5 lakh).
  • Annual interest: ₹47,015 (8.25% on running balance) → Fully exempt.
• Employee B(Contributes ₹3 lakh/year):
  • Taxable interest: Interest on ₹50,000 (excess over ₹2.5 lakh) is taxable .

5. Summary of Rules

(B)  Taxability of Transferred Balance from URPF to RPF

When an Unrecognised Provident Fund (URPF) is later converted into a Recognised Provident Fund (RPF), the transferred balance (i.e., the accumulated corpus) is not automatically exempt. Instead, the aggregate of employer’s contributions and interest thereon is taxable in the year of conversion under the head “Income from Salaries”.

What Gets Taxed:

1. Employer’s contributions to the URPF (to the extent not taxed earlier), and
2. Interest on employer’s contributions (again, if not taxed earlier).

These are added to the gross salary of the employee in the year the fund becomes recognised.

> The employee’s own contributions are not taxed (since they were made from post-tax income), and interest on those contributions is taxed only if it exceeds the prescribed limit (currently 9.5% per annum for RPFs).

Example:

Suppose Mr. Raj was part of a URPF for 5 years, during which:

• Employer contributed ₹2 lakh,
• Interest on employer’s contribution was ₹50,000.

If the URPF is converted into an RPF in FY 2024–25, then ₹2.5 lakh is taxable as salary income in that year.