The ‘TAX’ing Side of Gratuity and EPF Deductions

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gratuity and PF deduction in 2020

“There is a flip side to every coin”.

No doubt the government schemes and policies benefit the employees in several ways but there are also a few liabilities attached to them. At the time of retirement and post that, the liquidation of the amount saved from making contributions towards EPF and Gratuity is on everyone’s to-do list. Now, everyone is protective of this money that they have hard-earned and saved from their labor.

If not paid completely or in time, there are taxes applied to the amount saved through these funds which can invite legal as well as financial complications.

Hence, we say that there are unnoticed weightages that this set-aside money carries and needs to be described to a layman for better understanding. 

To explain the downside better, let’s talk about the taxable part of these important contributions like EPF and Gratuity. 

Taxability on Gratuity

Gratuity is an amount saved over a period of time by the employers and paid to the employees as a token of appreciation for their extraordinary services. It is a retirement benefit started under The Payment of Gratuity Act, 1972 and applies to the employees who have completed more than 5 years with a single organization employing more than 10 employees at a time. 

First things first, let’s understand gratuity calculation in depth. The formula for how to calculate gratuity is:

15/26 * Employee’s Last drawn Salary * No. of Completed Years of Service

Next, let’s look at the applicable taxes on gratuity. Employees working in the government or private sector who are covered under the Gratuity Act can enjoy overall tax exemption. But, the tax exemption, however, is subjected to certain limitations- 

  • As per the average of 10 months for every service year completed, the exemption is curtailed to half of the month’s salary. 
  • The earlier limit set by the government for tax-free gratuity was 10 lakhs. The same has been increased to 20 Lakh INR.

Taxability on Employees’ Provident Fund

Employees’ Provident Fund is another retirement benefits scheme, and the amount saved from it can be withdrawn before getting retired also. We now have the option of online PF withdrawal and balance inquiry to make things easier for employees.

Supervised and controlled by The EPFO, it applies to any employee earning monthly wages of INR 15,000 or less working with an organization that employs 20 employees or more. Both the employee and employer contribute 12% of the concerned employee’s basic pay. 

Looking at the tax aspect, if the amount paid by the employer’s end is more than 12%, then the tax is named as “income from salary”. The latest rules related to EPF that make it a little bit of liability are:

  • According to section 80C only INR 1,50,000 deduction is permissible and not more than that. 
  • If the interest rate is more than 9.5% earned from the Provident Fund the interest exceeding is considered as taxable income and comes under the ‘Income from other sources’ slab. 
  • If a taxpayer wishes to withdraw his/her PF amount prior to 5 years in the company, the interest amount and investment amount is subjected to different taxability parameters. 

Thus, even if it is a little bit, the benefit schemes that Gratuity and EPF are, they come with a small amount of taxing limitations and exceptional scenarios that seem to be liabilities at times.

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Kajal Sharma

Kajal Sharma is a Technology Enthusiast. Having completed her Bachelors in Technology, she keeps abreast of the latest engineering trends. She has an enriching experience of nearly 7 years in Technical Content Development and Content Marketing. Besides believing writing to be the strongest form of expression, she finds solace in music and can hum a few bars herself!

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