How are contributions to the EPF taxed?

Contributions to the Employees' Provident Fund (EPF) enjoy specific tax benefits that make option B the correct choice. When individuals contribute to the EPF, those contributions are tax-exempt at the time of deposit, meaning that they are not subject to income tax when they are made. Moreover, the tax-exempt status extends for the entire duration that the funds remain in the EPF account. After a continuous holding period of five years, both the accumulated funds – including interest earned – can be withdrawn without incurring any tax liability. This dual benefit of tax exemption during contribution and tax-free status after a specified holding period makes option B a clear and advantageous choice for maintaining long-term savings in the EPF.

Other responses do not accurately reflect the tax treatment of EPF contributions. For instance, while some might suggest that contributions or withdrawals could be fully taxable or subject to state income tax, the current structure of the EPF aims to encourage savings rather than impose immediate tax burdens. Similarly, the notion of being taxed at a reduced rate upon withdrawal does not align with the actual benefits offered, as withdrawals after fulfilling the five-year requirement are entirely free from tax.