Overview of the Employee Pension Scheme
The Employee Pension Scheme (EPS) forms an integral part of an individual’s retirement planning in India. A sub-set of the Employees’ Provident Fund (EPF), EPS provides a pension on disablement, widow pension, and pension for nominees. Comprehending the tax implications of the contributions and withdrawals in this scheme is crucial to maximise post-retirement income and minimise the tax liability.
Funding and Contributions to EPS
The Employee Pension Scheme is funded by the contributions from the employer’s contributions towards the EPF, which is 8.33% of the employee’s salary (subject to a maximum of INR 1250). Notably, this contribution to the EPS does not qualify for a tax deduction under Section 80C.
The pension from EPS is taxable under the head ‘Income from Other Sources’ in your income tax return. It is critical to understand that only the employee’s contribution towards the EPF is eligible for tax exemption under Section 80C up to a limit of INR 1.5 lakh per annum.
Taxation on EPS Withdrawals
Consequently, when it comes to withdrawals, if the total service period is less than ten years, the employee has an option to either withdraw the corpus or get it transferred to the new employer. The withdrawal of the EPS amount is taxable. However, if the accumulated balance in the EPF account is withdrawn before five years of continuous service, it is subject to tax. The ‘continuous service’ includes service with the previous employer, if the EPF is transferred.
For withdrawals post the five-year mark, the amount is exempt from tax. The five-year rule is waived off in specific cases like in the event of the employee’s ill health or the closure of the business by the employer.
Special Considerations for International Workers
One might wonder about the exceptions. In the case of International Workers, the period of continuous service for considering the tax on withdrawal is extended to six years, which is one of the exceptions to the general rule.
Pertaining to the pension received post-retirement, it may be noted that this amount is entirely taxable. The monthly pension from the EPS is added to your income and taxed as per the income tax slabs applicable for that financial year.
The taxation of the EPS falls into the EET (Exempt, Exempt, Taxed) category, meaning the maturity amount is taxable. The first ‘Exempt’ is for the investments made towards EPF, up to a limit of INR 1.5 lakh annually. The second ‘Exempt’ denotes that the interest accrued on these investments is tax-free. The ‘Taxed’ points to the withdrawals made post-retirement which are added to the annual income and taxed accordingly.
Summary:
The Employee Pension Scheme (EPS) is an important retirement plan for Indian individuals. However, tax implications related to contributions and withdrawals need to be considered to optimise benefits. The contributions towards EPS don’t qualify for tax exemption under Section 80C, and the pension received from this scheme is taxable. The withdrawals, if made before five years of continuous service, are liable to tax, while withdrawals post five years are tax-free. Knowing these implications allows for effective retirement planning. It is, however, subject to changes as per the prevalent tax laws and individuals should seek expert advice before investing.
Conclusion
The Employee Pension Scheme is a beneficial instrument to secure one’s post-retirement life. However, being aware of the tax implications of EPS contributions and withdrawals can help individuals plan effectively and avoid any unintended tax liabilities.
Disclaimer:
The tax implications related to the Employee Pension Scheme (EPS) and Employees’ Provident Fund (EPF) are outlined as per the current tax laws. These laws are subject to changes from time to time, and individuals are advised to consult with a financial advisor or tax consultant before making any investment decisions. The investor must gauge all the pros and cons of investing in the Indian financial market.
