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A significant change in tax rules has impacted how interest earned on Employees' Provident Fund (EPF) contributions is treated. After Budget 2021, interest on an employee’s contribution to an EPF account above Rs 2.5 lakh during a financial year is taxable in the hands of the employee. This interest is also subject to tax deducted at source (TDS).
EPF is a retirement scheme regulated by the EPFO (Employees Provident Fund Organisation). Any organisation or factory with 20 or more employees must be registered under EPFO; if any organisation has less than 20 employees, it can voluntarily register itself under EPFO. All employees, including regular and contractual workers whose wages are up to Rs 15,000 should be enrolled to the EPF by the organisation. The EPF amount is deducted from your salary on a monthly basis by your employer. It accumulates in your EPF account, which you can access after retirement.
"Prior to the rule change in 2021, the interest earned on contributions to the EPF was entirely tax-free. This meant that employees did not have to pay any tax on the interest income generated from their EPF balances, regardless of the amount. As per the rule change announced in the Union Budget 2021, effective from April 1, 2021, interest earned on employee contributions to EPF exceeding Rs 2.5 lakh per annum is taxable. This change was introduced to target high-income earners who were taking advantage of the tax-free status of EPF by contributing large sums to the fund," said CA Amit Bansal, Partner - Direct Tax, Singhania & Co.
Understanding the new EPF taxation rulesPreviously, all interest earned on EPF contributions was tax-free. However, starting from the financial year 2021-22, the government introduced a new rule:
Non-taxable account: This account will hold contributions up to Rs 2.5 lakh and the interest earned on it.
