Interest on EPF Contributions above Rs 2.5 lakh Taxable

The Indian Finance Minister has tabled today, the Union General Budget 2021-22 in the Parliament. 

One of the key amendments in the Finance Bill 2021 is related to EPF and VPF (Provident Fund) contributions.

As of now (FY 2020-21), the interest income earned on contributions to EPF made by the employee is completely TAX-FREE.

However, with effective from 1st April, 2021, no more tax free interest on more than Rs 2.5 lakh a year contribution towards EPF/VPF (only employee contribution).

This limit does not include the employer’s contribution. The new rules will also apply to the GPF (General Provident Fund).

Interest on EPF Contributions above Rs 2.5 lakh is Taxable

From 1st April 2021 onwards, the interest on any contribution above Rs. 2.5 lakh by an employee to a recognized provident fund is taxable as per the provisions of the Finance bill 2021.

• If employee contribution is more than Rs 2.5 lakh, the interest earned on the excess amount is taxable wef 1st April 2021 onwards.
• Your past EPF balance as on March 31, 2021 will always remain tax free.
• Example – If employee share EPF + VPF is Rs 4.5 lakh in FY 2021-22 then the interest earned on excess Rs 2 lakh (Rs 4.5 L – Rs 2.5 L) will be taxable in FY 2021-22 / AY 2021-22.
• You will then need to determine the interest amount corresponding to the excess, that is Rs. 2 lakh and declare it as income and pay tax as per applicable income tax slab rate.
• Note that the additional interest on this amount (Rs 2 lakh) in subsequent assessment years may not be taxable. (Let’s wait for more clarity on this aspect)

This new rule will impact the salaried individuals who make large contributions to EPF or VPF account.

Latest News (23-March-2021) : The Central Govt has capped the threshold limit to Rs 5 Lakh for earning tax-free interest on employees contribution to PF. However, it’s meant only for Defense Personnel and few other Govt employees where employer is not contributing into EPF.

The previous Budget 2020 has restricted the tax-exempt superannuation, NPS and EPF account contribution by the employer to maximum of Rs 7.5 lakh in a financial year. Further, any interest or gains earned from the excess contribution is be taxable in the hands of an employee. This amendment is applicable for FY 2020-21 (AY 2021-22) itself.

Latest news (March 2021) : EPF interest rate for 2020-21. The Central Board recommends 8.50 % rate of interest to its subscribers for the year 2020-21. EPFO notifies 8.5% as interest Rate on EPF for the year 2020-21.

The previous FYs EPF interest rates are as below;

• FY 2019-20 : 8.50%
• FY 2018-19 : 8.65%
• FY 2017-18 : 8.55%
• FY 2016-17 : 8.65%
• FY 2015-16 : 8.80%
• FY 2014-15 : 8.75%
• FY 2013-14 : 8.75%
• FY 2012-13 : 8.50%

Continue reading:

1. 15 Important Budget 2021 Proposals related to your Personal Finance | W.e.f AY 2022-23
2. EPF Interest Income & Withdrawals | Tax Implications | Is EPF Interest taxable?
3. Why should you Withdraw Old EPF Account Balance? | In-operative EPF A/c Timeline
4. EPF a/c interest calculation : Components & illustration (Employees’ Provident Fund)

(Post first published on : 01-February-2021)