Income Tax deduction on EPF Contribution

The salaried employees are required to contribute 12 percent of their basic salary plus dearness allowance towards their Employees' Provident Fund (EPF) account. The employer is also required to make a matching contribution to an employee's EPF account.

If you are opting for the new income tax rates as per the Budget 2020, you need to forego some deductions, including the popular Section 80C.

Under the new income tax regime as per the Budget 2020, there are seven slabs which are summarized in the table below-

Taxable slabExisting Tax Rates New Tax slab (2020-21)
0-2.5 Lakh
2.5-5 Lakh 
5-7.5 Lakh
7.5-10 Lakh
10-12.5 Lakh
12.5-15 Lakh
Above 15 Lakh

EPF contribution- Old tax regime vs New Tax regime

 Under the existing income tax laws, the employer’s contribution to the EPF account of an employee up to 12% remains tax-free. If it is above 12%, it becomes taxable. This provision is same under the new as well as old tax rates.

Any contribution towards EPF of up to 12% is eligible for deduction under Section 80C of Income Tax. This will continue under the old tax rate. However, if you opt for the new tax rates, you will not be eligible to claim any tax deductions under Section 80C.

However, in another income tax rule change proposed in Budget 2020, the employer's contribution that is above Rs. 7.5 lakh in a year towards NPS or National Pension Scheme, superannuation fund, and EPF will be taxable in the employees’ hands. This will be applicable under both the old and new tax rates.

It is to be noted that some deductions, including employer contribution on account of the employee in NPS under Section 80CCD (2), can still be availed if you opt for the new income tax regime. The limit is 14% of the salary for central government employees and 10% in case of others. If their organization allows, employees can opt to restructure their salary structure to opt for this tax deduction.