The Employees’ Provident Fund Organization (EPFO) earlier this month announced an interest rate of 8.1 per cent on EPF in members’ accounts for the financial year 2021-22, up from 8.5 per cent in the previous year. Effective April 1, 2021, interest on EPF was completely tax-free for provident fund contributors until the changes were introduced in Budget 2021. Interest earned on EPF contribution above a certain limit will be taxable. According to tax experts, separate accounts will be created within the provident fund account for taxable contribution and non-taxable contribution in 2021-2022 and all subsequent years. In other words, the Provident Fund Office or the Employees’ PF Trust will maintain two accounts for this purpose, one account with the contribution within a limit. And the second account will be for contribution in excess of the limit.
How the new income tax rules will be applicable on EPF interest
1) As per the new rules, any interest credited to the provident fund account of an employee will be tax free only for contributions up to Rs 2.50 lakh every year. Contribution of more than 2.50 lakhs of the employee will be taxed. According to tax expert Balwant Jain, if the employer does not contribute to the employee’s provident fund, then the applicable limit will be Rs 5 lakh of the employee’s contribution.
2) As per the interest rate announced by EPFO every year, the limit of 5 lakhs covers around 93 per cent of EPFO people and they will continue to get assured tax free interest.
3) The employer contributes 12 per cent of the basic salary and dearness allowance to the EPF and deducts 12 per cent from the employee’s salary. 8.33 per cent of the employer’s contribution goes to the Employees’ Pension Scheme (EPS), on which no interest is available.
4) Please note that it is the interest on the additional contribution which will become taxable and not the contribution itself. Additional contribution cannot be taxed as the contribution is made by the employee out of his salary which is already taxed.
The additional contribution cannot be taxed as the contribution is made by the employee from his salary which is already taxed,” Mr. Jain said.
5) In so far as the balance standing in the account of an employee as on March 31, 2021 is concerned, interest on non-taxable account will continue to be tax free.
6) Interest earned on this second account (taxable) will be taxed every year.
7) Interest earned on taxable account will not be taxed only in the year in which the contribution is made, but will be taxed in all subsequent years.