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Calculation of Taxable Interest on P.F. Contribution

Updated on: 20 May, 2024 06:10 PM

EPF stands for Employee Provident Fund, a retirement savings scheme for salaried employees.

EPF is mandatory for all employees earning more than Rs. 15,000 and working in an organization with over 20 employees. Initially, the employer’s contribution was completely tax-exempt, and interest earned from EPF was tax-free without any restrictions but from FY 2021-22, it is taxable if it exceeds a threshold provided by the EPFO. Let us talk in detail.

What is EPF?

EPF (Employee Provident Fund) is a retirement scheme regulated by the EPFO (Employees Provident Fund Organisation). Any organization or factory with 20 or more employees must be registered under EPFO; if any organization has less than 20 employees, it can voluntarily register itself under EPFO. All employees of the organization have to be enrolled under the EPF scheme if their wages are up to ₹ 15000.

EPF amount is deducted from your salary on a monthly basis by your employer. It accumulates in your EPF account, which you can access after retirement.

Important features of the EPF Scheme:

  • The employee should contribute to the EPF fund of ₹ 1,800 or 12% of the basic salary and the DA, whichever is lower.
  • The employer should make an equal contribution to the EPF account.
  • The EPF account earns interest at a rate of 8.15% (as amended in the latest budget) , declared by the Central Board of Trustees (CBT) every year.
  • The EPF account can be accessed online through the Universal Account Number (UAN), a unique 12-digit number allotted to every member.
  • The EPF account can be withdrawn partially or fully under certain conditions, such as retirement, unemployment, medical emergency, education, marriage, housing, etc.
  • The employee can contribute more than 12% of basic salary + DA using VPF (voluntarily provident fund), but the employer is not bound to match contributions above 12% of salary + DA.

What is the old tax provision for Income Tax on PF Interest?

Interest earned on EPF was completely tax-free before the Finance Act 2021 amendments, so the tax-free limit on interest earned on EPF was not applicable. According to Section 80C of the Income Tax Act, 1961, EPF contributions were eligible for tax deduction up to a maximum of ₹ 1.5 lakhs in a financial year. The employer contribution to PF was eligible for tax exemption up to 12% as per the PF income tax rules; PF contributions above 12% were taxable.


What is the new tax provision for Income Tax on PF Interest?

As per new amendments in Finance Act, Interest earned on EPF is taxable from FY 2021-22. The act introduced new tax exemption limits for government and private sector employees.

For government employees where there is no employer contribution, individuals can contribute up to ₹ 5 lakh without being taxes. , Interest earned on EPF beyond ₹ 5 lakh is taxable from FY 2021-22.

Other than government employees taxable are those whose contributions exceed Rs. 2.5 lakh, and no tax is levied on contributions below the threshold.

Other than this, an additional change is that employer’s contribution in NPS, EPF, and superannuation funds exceeding Rs. 7.5 lakh will be taxable in the hands of employees.


How to calculate the taxable and non-taxable shares of EPF interest?

To calculate the taxable and non-taxable shares of EPF interest, one has to maintain two separate accounts for each financial year starting from FY 2021-22: one for the non-taxable contribution (up to ₹ 2.5 lakh or ₹ 5 lakh) and another for the taxable contribution (above ₹ 2.5 lakh or ₹ 5 lakh). The interest accrued on each account will be calculated separately, and the interest on the taxable account will be added to the employee's income. The taxable interest would be considered as “income from other sources” and will be subject to TDS if it exceeds Rs 5,000 a year.

Illustration

Mr. Ram’s total PF contribution (including interest) is ₹ 5,50,000 as on 31st March 2022. Ram works in a company registered under EPFO and contributed ₹ 3,50,000 to his EPF account in FY 2022-23. He received an interest of 8.15% on his contribution.

Now calculate his taxable and non-taxable contributions for FY 2022-23.

Answer

Taxable contribution Non-taxable contribution
Closing balance, including interest, as on 31st March 5,50,000
The contribution made in FY 2022-23 1,00,000 2,50,000
Interest accrued for FY 2022-23 8150 20375
total 108150 820375

How does PAN linking affect the TDS rate on PF contribution interest?

The Income Tax Act, Section 194A, requires the provident fund office or EPF trust to deduct Tax Deducted at Source (TDS) on the interest earned by your Provident Fund contributions. This essentially means a portion of the interest is withheld before it reaches your account. For resident Indians, the TDS rate depends on your PAN linkage: a lower rate of 10% applies if your PAN is linked, while a higher rate of 20% is deducted if your PAN isn't linked. There's also a minimum threshold - TDS is only deducted if the total PF interest you earn in a financial year exceeds Rs. 5,000 (this applies to your combined interest income from all sources).

If TDS deducted on the interest you received from your PG contribution is less than your actuall taxablity it requires you to file your ITR, you can file your income tax return online using our DIY option and if you need assistance filing your ITR, our team of tax expert help you file your return and maximize your refund so you can keep more of what you earn. Book Online CA Today!


Frequently Asked Questions

Q- What is the interest rate of EPF in new budget?

The EPFO Board has established the Employees’ Provident Fund Interest Rate for 2022–2023 at 8.15%. The interest rate for FY 2021-22 was 8.10%.


Q- Is interest on PF taxable on contribution over and above 2.5 lakhs?

Yes, according to amendments in Budget 2021, interest on an employee’s contribution to an EPF account above Rs 2.5 lakh in a financial year is taxable. This interest is also subject to TDS.


Q- What is the difference between employee PF and employer PF contributions?

The main difference between the employee PF and employer PF is that the employee’s contribution (12% of Basic salary +DA) is deducted from their salary and deposited into their EPF account. In contrast, the employer’s contribution (only 3.67% of the employer's share contributed towards EPF, while the remaining goes towards EPS) is paid directly by the employer.


Q- Is interest on EPF taxable after retirement?

Interest earned on the accumulated balance after retirement from employment (i.e., during periods of no contribution to the EPF) is taxable, regardless of your total contribution duration with the EPF.


CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.