EPF Confusion – Tax-Free OR Taxable ?

Interest Earned, on Employee’s Contribution over Rs 2.5 lakh, is Taxable

Budget 2021 or Finance Act, 2021, introduced taxation on EPF (Employee Provident Fund). Lots of confusion and questions are there on EPF Taxation – What is taxable ? What is NOT taxable ? From what date this is applicable ? Who will maintain tax data ? How to pay this tax ? How to include this taxation in Tax Return form ? etc etc. Let’s address all the confusions, one at a time.

Question – From when EPF taxation is applicable ?
Answer – “EPF taxation is prospective from 1 April 2021. All interest in EPF account as on 31 March 2021 is grandfathered by making all interest as part of the ‘non-taxable account’“. In simple terms, EPF Taxation is applicable from 1-April-2021 onward. EPF taxation is NOT applicable before 1-April-2021. All contributions and interest earned till 31-March-2021 is tax-free.

Question – On what component EPF taxation is applicable ?
Answer – EPF taxation is –

  • Applicable ONLY on a PART of interest earned on employee’s contribution,
  • NOT applicable on employee’s contribution,
  • NOT applicable on COMPLETE interest earned on employee’s contribution,
  • NOT applicable on employer’s contribution,
  • NOT applicable on interest earned on employer’s contribution

Question – On what portion of interest, EPF taxation is applicable ?
Answer – In case of employer and employee both contributing to EPF then interest earned, on the employee’s contribution of over Rs 2.5 lakh in a year, is taxed. Employee contribution limit of Rs 2.5 lakh includes VPF contributions. Let’s understand this better –

  • Employee’s contribution is equal to OR less than Rs 2.5 lakh in a year then there is NO tax on the interest earned
  • Only when employee’s contribution is more than Rs 2.5 lakh in a year then the interest earned, on the contribution which is more than Rs 2.5 lakh, is taxed. For example employee’s contribution is Rs 3 lakh in a year then –
    • Rs 3 lakh contribution is non taxable,
    • Interest earned on Rs 2.5 lakh contribution is also non taxable
    • Only interest earned on Rs 50,000, ( 3 lakh – 2.5 lakh ) which is over and above Rs 2.5 lakh, is taxable

In case an employer does not contribute to the EPF then interest earned, on the employee’s contribution of over Rs 5 lakh in a year, is taxed. Employee contribution limit of Rs 5 lakh includes VPF contributions. Let’s understand this better –

  • Employee’s contribution is equal to OR less than Rs 5 lakh in a year, then there is NO tax on the interest earned
  • Only when employee’s contribution is more than Rs 5 lakh in a year then the interest earned, on the contribution which is more than Rs 5 lakh, is taxed. For example employee’s contribution is Rs 5.5 lakh in a year, then
    • Rs 5.5 lakh contribution is non taxable,
    • Interest earned on Rs 5 lakh contribution is also non taxable
    • Only interest earned on Rs 50,000, ( 5.5 lakh – 5 lakh ) which is over and above Rs 5 lakh, is taxable

Exception on Employer’s Contribution – From Financial Year 2020-21 onward, the employer’s contribution to the EPF account is taxable if the employer’s contribution to EPF, NPS and/or superannuation fund exceeds Rs 7.5 lakh in a financial year. The employer calculate this taxable amount to be taxed as a prerequisite, and reflects this in the employee’s Form 16.

Question – Who / How will EPF Taxation be tracked ?
Answer – EPF office or the employee’s PF trust maintains two separate accounts for employee’s EPF account. These two accounts is maintained from 1-April-2021, for Financial Year 2021-22 and for all subsequent years.

  1. Non Taxable Account – One account maintains contributions within the threshold (non-taxable contribution account) and it’s interest
  2. Taxable Account – Second account maintains contributions exceeding the threshold (taxable contribution account) and it’s interest

Question – How is the interest earned on the taxable interest treated in subsequent years?
Answer – The interest earned on the taxable account is taxed every year. The previous years accumulations in the taxable account is carried forward to subsequent years. The interest earned on carried forward taxable account along with interest earned on contributions during the year is taxed.

Question – How is EPF tax deducted or paid ?
Answer – TDS is deducted only when the taxable interest amount is greater than Rs 5,000 in a year.

  • Resident Indians, the TDS rate is 10% when the EPF account is linked to a PAN. When EPF is not liked to a PAN then TDS is 20%
  • Non-resident Indians (NRIs), TDS is 30%
  • Any tax, beyond TDS, on taxable interest is paid as Self Assessment Tax in Tax Return Filing process by the individual

Question – How to account for taxable interest and TDS in Tax Return ?
Answer – The taxable interest needs to be included in tax return form under category “Income from other sources’. TDS, if any deducted on taxable interest, is entered and tax credit claimed under TDS section of Tax Return Form. Tax Return form calculates pending tax, if any, as per the applicable tax slab rates of the individual.

GOOD PRACTICE – Declare the Non Taxable Interest earned in EPF every year in your tax return form under section “Exempt Income“