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- an amount was withdrawn from the fund provided all exemption criteria were met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%.
TDS on Hotel Accommodation – Section 194I of the Income Tax Act