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Interest earned on your EPF or VPF contribution remains tax-free up to an employee contribution limit of ₹2.5 lakh per financial year. If your own contribution exceeds this limit, the interest earned on the excess amount becomes taxable under 'Income from Other Sources'. For PF accounts without employer contribution, the exemption limit is ₹5 lakh.
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.
The EPF framework consists of three key components that provide savings, pension, and insurance benefits to employees:
To calculate the taxable and non-taxable shares of EPF interest, one has to maintain two separate accounts for each financial year: 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.
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.
| 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 |
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).
The EPFO Board has established the Employees’ Provident Fund Interest Rate for 2025-26 at 8.25%.
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.
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.
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.
