TDS Deduction on EPF Interest:– Earlier, Employee Provident Fund (EPF) withdrawals were fully tax-free if the employee had completed five years of continuous service. However, the rules changed on August 31, 2021 with the introduction of Section 17(2)(vi) of the Income Tax Act, which made the interest earned on EPF contributions above ₹2.5 lakhs per annum taxable in the hands of the non-government employee and ₹5 lakhs for the government employees . Therefore, while the EPF contributions made by the employee and the employer remain tax-free, the interest earned on the EPF account above the specified limit is subject to tax.
An individual can claim a deduction under Section 80C of the Income Tax Act for the amount contributed to their Employee Provident Fund (EPF) account, up to a maximum of ₹1.5 lakhs in a financial year. This deduction is available for both the employee’s and employer’s contributions to the EPF account. This helps in reducing the taxable income of the individual, resulting in lower tax liability.
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- an amount was withdrawn from the fund provided all exemption criteria were met
What does the new guideline say?
From 1 April 2022, the tax authorities will consider interest earned on an employee’s contribution to the fund taxable if it exceeds INR 2.5 lakhs in a financial year. However, any interest not exceeding INR 2.5 lakhs in a financial year will remain tax-free. If the employer is not contributing towards the fund, the threshold increases to INR 5 lakhs.
Under the new rule, any interest earned from excess contributions made by an employer exceeding INR 7.5 lakhs per financial year will be taxable as perquisites in the hands of the employee. The employee will be taxed accordingly on this interest.
Applicability of TDS Deduction on EPF Interest?
All EPF subscribers are subject to the new rule, which means that TDS is applicable in the case of transfer claims, final settlement, transfer from exempted establishments to the EPFO, or vice versa, as well as in case of any transfer between trusts.
TDS (Tax Deducted at Source) is applicable on EPF (Employee Provident Fund) interest if the interest earned on EPF contributions exceeds the threshold limit set by the government. As of 1 April 2022, any interest earned on an employee’s contribution to the EPF exceeding INR 2.5 lakhs in a financial year will be subject to TDS. Additionally, any interest earned on excess contributions made by an employer exceeding INR 7.5 lakhs per financial year will also be subject to TDS.
Read more: TDS Deduction on EPF Interest (2023 Latest Rule)TDS ON SALARY-Easy Process to claim Refund
Subjected TDS Rates for PF
The rate of TDS on EPF interest is 10% if the employee’s PAN (Permanent Account Number) is linked to the EPF account. However, if the PAN is not linked or not provided, the TDS rate is 20%.
If an NRI (Non-Resident Indian) is working in a country with which India has entered into a Double Taxation Avoidance Agreement (DTAA), the rate of TDS (Tax Deducted at Source) on their EPF (Employee Provident Fund) interest would be lower than 30%, as per the provisions of Section 90 of the Income-Tax Act.
Is TDS on EPF Interest applicable retrospectively?
The applicability of TDS (Tax Deducted at Source) on EPF (Employee Provident Fund) interest retrospectively would depend on the specific tax laws and regulations of the country in question.
In India, for example, the Central Board of Direct Taxes (CBDT) announced in March 2021 that TDS would be applicable on EPF withdrawals of more than INR 5 lakh per annum, with effect from 1st April 2021. This means that TDS on EPF interest is not applicable retrospectively in India, but only from the specified date forward. 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 | 1013 | 1,688 |
| 40,000 | 4,40,000 | 2,50,000 | 1,90,000 | 2,970 | 1283 | 1,688 |
| 40,000 | 4,80,000 | 2,50,000 | 2,30,000 | 3,240 | 1553 | 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%.
Read more: TDS Deduction on EPF Interest (2023 Latest Rule)Time Limit Due Date for TDS payment & filing TDS return for FY 2023-24?-Accounts Profession
It’s important to note that tax laws and regulations are subject to change, and the applicability of TDS on EPF interest could be revised in the future. It’s always advisable to check with the relevant tax authorities or a qualified tax professional for the most up-to-date information on tax laws and regulations.
FAQ’s
What is current EPF interest rate?
Earlier in March 2022, the CBT had recommended a four-decade low-interest rate of 8.1 per cent for close to 60 million active subscribers of the social security organisation for the financial year 2021-22, leaving it with an estimated surplus of Rs 450 crore. It was then ratified by the finance ministry in June 2022.
Does PF interest stop after 3 years?
Even after leaving the establishment a person can continue his membership. However,if no contribution is received into a PF account for 3 consecutive years the account shall not earn any interest after 3 years from the stopping of contribution.
What is the interest rate of EPF vs PPF?
The currentEPF rate is 8.10% while the current PPF rate is 7.1%. Historically as well, the EPF rate has been slightly higher (8.65%) than the current rate FY 2021-22 and the current PPF rate.
Can we invest more than 1.5 lakh in EPF?
Effectively, the total EPF account contributions via EPF and VPFshould not exceed Rs 2.5 lakh in a financial year.