Employee Provident Fund (EPF) was earlier not subject to tax and was tax-free in the hands of the employee.
When a contribution was made, the employee could claim an income tax deduction under section 80C of the Income Tax Act, 1961 against such contribution up to INR 1.5 lakhs.
Employee Provident Fund (EPF) was not subject to tax when:
- Interest was declared on the accumulated balance
- An amount was withdrawn from the fund provided all exemption criteria were met
However, the Employees’ Provident Fund Organisation has done away with a few of the above tax benefits by issuing the guidelines on imposing TDS (Tax deducted at source) on the interest earned via EPF account where the contribution exceeds INR 2.5 lakhs in a financial year.
On August 31, 2021, the CBDT (Central Board of Direct Taxes) reported that when the contribution to an employee’s provident fund exceeds INR 2.5 lakhs for the non-government employees and INR 5 lakhs for the government employees then the interest earned through these contributions would be subjected to TDS.
What does the new guideline say?
Effective last year (1 April 2022), any interest on an employee’s contribution to the fund not exceeding INR 2.5 lakhs in a financial year will be tax-free and interest earned on the contribution exceeding INR 2.5 lakhs will be taxable in the hands of the employees. This threshold of INR 2.5 lakhs was increased to INR 5 lakhs if the employer isn’t contributing towards fund.
Further, in addition to contributions made by an employer exceeding INR 7.5 lakhs per financial year which is taxable as perquisites, any interest earned from such excess contribution would be taxable in the hands of the employee and will be taxed accordingly as per the new rule.
Applicability of TDS Deduction on EPF Interest?
The new rule is applicable to all EPF subscribers. TDS is applicable in case of transfer claims, final settlement, transfer from exempted establishments to the EPFO, or vice versa. This would also apply in case of any transfer between trusts.
Subjected Rates for PF
TDS rate would depend on whether the provident fund account is linked to a PAN (Permanent account number). TDS would be deducted on interest earned at a rate of 10% for employees who have PAN and 20% for those who don’t have a PAN.
In case of the double taxation avoidance agreement (DTAA) has been entered into with the NRI’s working country, then the rate lower than 30% would apply, as per the provisions of Section 90 of the Income-Tax Act.
Is it applicable retrospectively?
No TDS would be applicable on the past accumulation till March 31, 2021. It would only apply to the contributions that are made from April 1, 2021, which is more than the threshold limit of INR 2.5 lakhs.
Example:
Mr. A is contributing INR 40,000 per month to the EPF.
Let’s calculate his taxable interest and the TDS on the interest:
| Monthly Contribution | Cumulative Balance | Tax Limit | Contribution exceeding tax limit | Interest per month (8.1%/12) | Taxable Interest | Non-taxable interest |
| 40,000 | 40,000 | 2,50,000 | – | 270 | – | 270 |
| 40,000 | 80,000 | 2,50,000 | – | 540 | – | 540 |
| 40,000 | 1,20,000 | 2,50,000 | – | 810 | – | 810 |
| 40,000 | 1,60,000 | 2,50,000 | – | 1,080 | – | 1,080 |
| 40,000 | 2,00,000 | 2,50,000 | – | 1,350 | – | 1,350 |
| 40,000 | 2,40,000 | 2,50,000 | – | 1,620 | – | 1,620 |
| 40,000 | 2,80,000 | 2,50,000 | 30,000 | 1,890 | 203 | 1,688 |
| 40,000 | 3,20,000 | 2,50,000 | 70,000 | 2,160 | 473 | 1,688 |
| 40,000 | 3,60,000 | 2,50,000 | 1,10,000 | 2,430 | 743 | 1,688 |
| 40,000 | 4,00,000 | 2,50,000 | 1,50,000 | 2,700 | 1,013 | 1,688 |
| 40,000 | 4,40,000 | 2,50,000 | 1,90,000 | 2,970 | 1,283 | 1,688 |
| 40,000 | 4,80,000 | 2,50,000 | 2,30,000 | 3,240 | 1,553 | 1,688 |
| Total | 21,060 | 5,265 | 15,795 |
As above, it is apparent that TDS is deducted at 10% on the interest of INR 5,265 which is INR 523. In case the member’s PAN isn’t linked to his PF account, the tax would be deducted at 20% instead of 10%.
Sir/Madam
I am retired from PSU in 2022. My EPF account still holds my savings.
The EPF fund earns interest of about 10 Lacs per year.
There is no employer or self contribution after 2022 to 2025.
Company is making TDS @10% and showing in AIS/TIS under head 194A.
Please clarify whether I have to show it as Income, if I can show under deductions to avail tax return.
Requesting all of you to give your valuable opinion on priority.
Till March 2022, interest earned out of all deposits in the EPF A/c whether by employer or employee was 100% exempt from tax. As mentioned in your post, we understand that since April 2022 there is no further contributions to your EPF A/c. To our best understanding, there is no tax applicable on this interest income. Even if tax is being deducted @10% (TDS), you should be able to claim it as a refund. However, a tax consultant will be able to scrutinize the matter more diligently.
Hello TDSMAN. Based on above article, is my below understanding correct?
There are 2 limits, depending on type of contribution –
1) Interest on contribution upto 2.5 lakh is tax free – only includes EMPLOYEE contribution (PF + VPF)
2) Interest on contribution upto 7.5 lakh is tax free – only includes EMPLOYER contribution
Thanks in advance
The Point #1 is correct
The Point #2 is also correct – additionally, please note that any contribution by the employer in excess of Rs. 7.50L/annum, the excess amount is added as a taxable perquisite to the salary income – further, please also note this amount of 7.50L, apart from EPF also includes contribution towards NPS and Superannuation.
The above is our interpretation – it is always prudent to take advise from tax experts.
Dear Sir,
Is it not double taxation for excess amount of deposit in EPF account which is more than Rs.2,50,000. Since, the amount to be deposited in EPF is already counted as taxable income on the employer hand. Again if somebody deposit his earned money in the PF account, which is more than 2.5 lac, the amount is again taxable after deducting 2.5 lac.
Another query is that in case of a senior citizen who have retained his/her PF amount in EPF account as per the provision of the company policy, what will be the taxable amount on interest earned for tax computation purpose.
Is it full amount of interest taxable or it will be taxed after a relief of 2.5 lac or for Senior Citizen an extended relief is there. In this case no. Employer contribution exists.
May please inform
There are two parts of your query
First on ‘double taxation’ – the tax is on interest earned and not the deposit amount – hope this clarifies your query.
Answering the second part, the PF Dept maintains two cumulative amounts of deposit (non-taxable part and taxable part) – the income earned from ‘interest’ on the ‘taxable part’ is subject to taxation. Current TDS for such income is 10%.
As always, please reconfirm with tax experts.
The 10% TDS on interest income for contribution in excess of 2.5 lakhs – will there be a Form 16A or will it be shown in Form 26AS or AIS or TIS? It does not seem to be reflecting anywhere. And you need the TAN and other information in the TDS2 column of ITR2. How do we get that?
The TDS on interest income related to PF (contribution exceeding Rs. 2.50L in a year), needs to be addressed by EPFO or the Recognized PF Trust. If the compliance is proper, it will reflect in Form 16A and also in the AIS / TIS. If this is not appearing, there may be some irregularity on the compliance – it is prudent to check with the EPFO / PF Trust and get this sorted out. Also please check at your end, whether tax has actually been deducted.
Hi
Sir
Is there any exemption on this that no tax liability for locking period 5yrs for additional pf contribution
Although your question does not directly relate to the above blog post, however, will share some insights that may be helpful.
If withdrawal is after completion of 5 years, the entire amount is tax exempt which includes both employee & employer contributions and interest earned. However, if this is done before 5 years, this would be subject to tax as follows:
– Employee Contribution – will be taxable, if you have claimed deduction u/s 80C
– Employer Contribution & Interest – fully taxable under the head ‘Income from Salary’
– Interest on Employee’s Contribution – taxable under ‘Income from Other Sources’
There are some exceptions such as medical emergencies, business closure, reasons beyond your control, etc. As always, the tax professional should be consulted.