I plan to opt for the new tax regime when filing my ITR for AY 2025-26. Currently, I am on the old tax regime, so the 12% of my salary to the Employee Provident Fund (EPF) will continue through the rest of the financial year. Is it correct that I cannot claim a tax exemption on my EPF contributions? If I choose the new tax regime at the beginning of FY 2025-26, can I request my employer to stop deducting the 12% EPF contribution from my salary, or is this contribution mandatory regardless of the tax regime? Does opting for the new tax regime mean that EPF’s exempt-exempt-exempt (EEE) tax status no longer applies? In other words, is the tax-free nature of EPF contributions, growth, and withdrawals affected under the new regime?
In the case of the new regime, you would not be able to claim the deduction on your contribution to EPF. However, the contribution by your employer to the extent of 12% of the salary continues to be exempt in your hands even under the new tax regime, subject to the overall limit of employer’s contribution to PF and NPS of ₹7.5 lakh annually. If your salary exceeded ₹15,000 on joining, while you could have chosen not to register as a member for PF, once you have opted for PF, you cannot opt out during the period of employment. Therefore, even though your contribution to PF which is deducted from your salary is no longer deductible under section 80C of the Income Tax Act, you would need to continue contributing to PF during the period of your employment.
However, you can choose to reduce your voluntary contribution to PF, that is, the contribution of PF over 12% of ₹15,000. If your monthly salary is ₹60,000, your monthly contribution of ₹7,200 can be reduced to ₹1,800 (12% of ₹15,000). This is an option only if you have contributed voluntarily for at least five years, as one cannot discontinue voluntary PF within a period of five years from commencing such contribution. The employer is also not obligated to contribute to PF in excess of ₹1,800 per month.
While reducing your PF contribution, you need to keep in mind that the employee contribution cannot be lower than the employer contribution. You should analyse whether such an option is beneficial to you, as a reduction in PF contribution by the employer (which would have otherwise been exempt) would result in increase in your taxable salary, since the employer would then pay you a taxable allowance to compensate.
EPF continues to be partially EEE; there is an exemption on employer contributions, an exemption for interest earned, and an exemption on withdrawal (all exemptions subject to thresholds) even under the new tax regime. Only the employee contribution to PF is no longer tax deductible under the new regime.
Mahesh Nayak, chartered accountant, CNK & Associates