Taxation of Interest on EPF Contribution Exceeding Rs 2.5 Lakh
- Bhavika Rajput
- 4 days ago
- 8 min read
Interest generated on Employees' Provident Fund (EPF) contributions is now treated differently due to a major change in tax laws. Following Budget 2021, interest paid by an employee to an EPF account in excess of Rs 2.5 lakh during a fiscal year is taxed in the employee's name. Additionally, tax deducted at source (TDS) applies to this interest. However, this cap is Rs. 5 lakh for government workers. Understanding the implications of this guideline is essential for all employees in India looking to optimise their tax liability.
Table of Contents
What is EPF?
The Employee Provident Fund (EPF) is a retirement benefits program applicable to salaried employees in India. This program is run by the Employees Provident Fund Organisation (EPFO). All factories and organisations with 20 or more employees are mandated to register with the EPFO. EPF registration is, however, optional for certain firms having fewer than 20 employees. The company should enlist all employees, including regular and contract, whose salaries exceed Rs 15,000 in the Employee Provident Fund (EPF). The employee must contribute to the fund after registering, and the company will match the employee's contribution. Employees are unable to sign up for EPF on their own. Therefore, with their employer's approval, employees who get salaries exceeding Rs 15,000 may contribute to an EPF account.
Key Features of the EPF Scheme
The employee must contribute Rs 1,800 to the EPF or 12% of their base pay and dearness allowance, whichever is lower. The majority of businesses remove 12% of salaries plus DA. Additionally, the employer is required to contribute equally to the EPF account.
The maximum monthly wage cap at which EPF contributions can be made is Rs 15,000. In order to raise the employee's in-hand salary, some businesses contribute a minimum of Rs 1,800 each month, or 12% of Rs 15,000. The majority of businesses, however, decide to contribute 12% of the base pay plus DA.
Through the voluntary provident fund (VPF), the employee can make larger payments, but the employer is not required to match contributions beyond 12% of the employee's base pay plus DA. At the conclusion of the fiscal year, the interest on the PF contribution is credited to the PF account.
Every year, the government sets the interest rates for the EPF. Interest is typically credited to the EPF account following the conclusion of the fiscal year.
According to EPFO regulations, a company with less than 20 workers must contribute 10% of its total income to the Employee Provident Fund (EPF) rather than 12%.
The employee will receive a lump-sum retirement payment upon retirement, which will include interest accrued on both the employer's and employee's contributions.
Taxation of Income from EPF Contributions
Interest paid by an employee to an EPF account that exceeds Rs 2.5 lakh during the fiscal year is taxable in the employee's hands following Budget 2021. TDS also applies to this interest. Only employee donations will be subject to this rule; employer contributions will not be subject to taxes. VPF contributions will also be included in the interest computation for the Rs 2.5 lakh level.
Illustration: The base salary for an employee is Rs 50,000 per month (no dearness allowance). 12% of the basic pay, or Rs 6,000, is withheld by the employer as an EPF contribution. Nonetheless, during the financial year, the employee willingly contributes Rs 3.28 lakh to the VPF. As a result, the employee will have contributed Rs 4 lakh (Rs 6,000 x 12 + Rs 3.28 lakh) to the EPF overall for the year. Tax on interest earned or accrued on the excess contribution of Rs 2.5 lakh [Rs 72,000 (EPF) + Rs 3.28 lakh (VPF) – Rs 2.5 lakh] will be due from the employee.
The Rs 2.5 lakh threshold has been increased to Rs 5 lakh for government employees who make EPF contributions. In other words, the employee will be liable for interest on EPF contributions beyond Rs 5 lakh. Prior to FY 2021–2022, interest paid to the EPF account on any contribution was exempt from taxes. Interest on contributions over the newly imposed threshold of Rs 2.5 lakh would be subject to taxation.
Tax Deduction on EPF Contribution
Section 80C permits an employee to deduct up to Rs 1.5 lakh for contributions made to the EPF account. Starting in FY 2020–21, if an employer contributes more than Rs 7.5 lakh to an EPF, NPS, or superannuation fund in a single financial year, their contribution to the EPF account would be subject to taxes. The extra money will be subject to taxes. As a requirement, the employer must determine the amount that will be taxed, and the employee's Form 16 will reflect this. This amendment became operative on April 1, 2021. This implies that interest on employee EPF contributions beyond Rs 2.5 lakh will also be subject to taxation in FY 2024–2025.
Taxable Part of EPF Interest
According to notification No. 95/2021, dated August 31, 2021, the PF department will keep different accounts for each subscriber, one with taxable contributions and one with non-taxable contributions, in order to calculate taxable interest beginning with the fiscal year 2021–2022. The interest accumulated in the taxable contribution account will be subject to taxation by the taxpayer.
TDS Deduction on EPF Interest
According to Section 194A, 10% TDS shall be withheld from taxable interest income exceeding the threshold amount for the year. If the interest for the financial year exceeds Rs 5,000, TDS is deductible for Indian residents. There is no threshold limit for non-residents, nevertheless. Even if the interest income for the year is below the Rs 5,000 cap, tax is still deductible. The interest on the taxable portion of the PF contribution must be taxed. Tax should be calculated according to the relevant income tax slab rates on the amount of taxable PF interest. For the TDS withheld from interest income, the employee is eligible to receive a tax credit.
Applicability of the New TDS Rule
The new TDS rule applies to:
Unexempted establishments
Exempted establishments
Exempted trusts
International workers
Death of PF members
When Will TDS on EPF Interest be Deducted?
When processing EPFO's annual accounts
PF payments made to departing members on a final settlement during the year
Transfer claims pertaining to historical accumulations
Transfers from one trust to another
Transfers from exempted establishments to EPFO and vice versa
According to Section 194A of the Income Tax Act, the TDS on taxable interest on the PF account must be subtracted. According to the legislation, TDS must be withheld by the income payer. As a result, the PF department, not the employer, has to pay interest on the PF account. As a result, EPFO will deduct TDS and deposit it with the government. Additionally, Form 16A will be issued for the same by the EPFO.
TDS Deduction Rate on Taxable Interest on EPF Contributions
Resident Indians
For Indian residents, the TDS rate will be 10% if their PF account is linked to a PAN.
The TDS rate will rise to 20% if the PF account is not connected to the PAN.
For Indian residents, however, TDS will only be withheld if the interest exceeds Rs 5,000.
Non-Residents
According to Section 195, the TDS would be subtracted at a rate of 30%. Nonetheless, if the TDS rate outlined in the Double Taxation Avoidance Agreement (DTAA) benefits PF members, then it will be used. If the PF account is not connected to the PAN, the TDS rate is likewise 30%. Non-residents are subject to a 4% cess and surcharge. However, if the TDS is withheld in accordance with DTAA regulations, there won't be a 4% cess or a fee. The following lists the appropriate surcharge rates on interest income earned by non-resident individuals for FY 2023–2024:
Interest income below Rs 50 lakh: No Surcharge
Interest income Rs 50 lakh-Rs 1 crore: 10%
Interest income Rs 1 crore-Rs 2 crore: 15%
Interest income Rs 2 crore-Rs 5 crore: 25%
Interest above Rs 5 crore: 37%
Due Date for TDS Deduction on Taxable PF interest
Employees in the public and private sectors will be subject to the new TDS rule on contributions starting in the financial year 2021–2022 and going forward. Until March 31, 2021, no TDS is applied to previous accumulations. Contributions after this date that exceed the Rs 2.5 lakh limit will be subject to it.
On the day that interest is credited to the EPF account, the PF department will deduct TDS in the absence of transfer or final settlement in the case. At the close of the financial year, the PF department credits interest to the PF account. In all other situations, including final settlements, transfer claims, transfers from EPFO to exempted establishments, and vice versa, TDS will be subtracted on the transfer date, final settlement, or April 1, 2024, whichever comes first.
Treatment of Interest-on-Interest on the Excess EPF Contribution
According to EPFO's current accounting method, interest is credited annually. The TDS must be subtracted from the interest earned on the taxable share of the PF contribution if the combined EPF and VPF contributions during the fiscal year exceed Rs 2.5 lakh. The interest earned on the opening balance and the current year's contribution beyond the Rs 2.5 lakh threshold of the taxable account would be taxable in the following years, together with the accumulations from the prior years. A non-taxable account's pushed-forward balance interest will not be subject to taxes.
Tax on EPF Withdrawals
There is no tax due on the contribution amount or interest earned if an EPF withdrawal is made following five years of continuous service. However, you will not be free from taxes if you take out cash before the five-year period if you need it for emergencies. Additionally, 10% TDS would be deducted by the PF department from EPF withdrawals made prior to five years of continuous service.
Conclusion
The treatment of interest earned on EPF contributions has witnessed a big change after the government implemented a new rule in the financial year 2021-22. From being tax-free, now it has a new threshold limit at Rs 2.5 lakh annually and interest exceeding this limit is taxable. Being aware of the category you come in will enable you to plan your taxes and claim TDS deductions accordingly.
FAQs
Q1. What is VPF?
As a Voluntary Provident Fund (VPF), an employee may choose to increase their monthly PF contribution up to 100% of their base pay. This excess contribution (above 12% of the base pay + DA) is not required to be matched by the employer. Since a separate account for VPF does not exist, this sum is credited to the same EPF account, and the interest would also be the same.
Q2. What is the interest rate of EPF for the FY 2025-26?
EPF interest rate for the financial year 2025-26 is 8.25% p.a.
Q3. What is the threshold limit on interest income above which TDS will be deducted?
If the interest earned annually in the PF account exceeds Rs 5,000, TDS is deductible for Indian residents. There is no threshold limit for non-residents, nevertheless. Tax is still deductible for them even if the interest income is below the threshold.
Q4. What is the exemption limit for EPF interest?
For government employees, the threshold for exemption is 5 lakh. Interest generated on EPFs beyond 5 lakh is subject to taxation starting in FY 2021–2022. For non-government employees, the same threshold is Rs. 2.5 lakh; if an EPF payment is above this amount, interest generated on the excess amount is subject to taxation starting in FY 2021–2022.
Q5. Is the contribution made to EPF taxable?
Employee's contribution to EPF is not taxable.
Q6. How can non-residents claim for double taxation benefit?
A Tax Residency Certificate (TRC) must be obtained by the member by submitting Form 10F to the income tax department in order to receive DTAA benefits. After receiving an application in Form 10F, the Assessing Officer may, if satisfied, issue a TRC in Form 10FB.
Q7. Who is liable to deduct TDS on taxable PF interest?
According to Section 194A of the Income Tax Act, the TDS on taxable interest on the PF account must be subtracted. According to the legislation, TDS must be withheld by the income payer. As a result, the provident fund department, not the employer, is responsible for paying interest on the PF account. As a result, EPFO will deduct TDS and deposit it with the government. Additionally, Form 16A will be issued for the same by the EPFO.
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