EPF Interest taxable beyond 2.5 Lakh – Impact Analysis

As per new provision made in budget 2021 EPF interest amount beyond 2.5 Lakh is taxable. If you are contributing higher amount in EPF you will be affected by the new provision. Let’s discuss this new income tax provision and its impact.

EPF Interest taxable beyond 2.5 Lakh

Presently, any amount received by an employee in EPF account is fully tax free. This include interest contribution on EPF. You must be aware that the employee provident fund comprises of contribution made by the employer, employee as well as interest on the contributed amount.

Now onwards any interest earned on the extra contribution beyond 2.5 Lakh in a year will be taxable. Let’s try understand this by example.

Suppose, you are contributing 3 Lakh per year to your EPF account. In this case, amount 2.5 Lakh would be tax free. Interest earned on extra contribution of Rs.50000 would be taxable. The interest amount would be added in your income add tax amount would be as per applicable tax slab.

What is the impact?

Case 1 – EPF Contribution as per Basic Salary

You need not to worry in case your yearly EPF contribution is less than 2.5 Lakh. This means your monthly EPF contribution should be less than Rs.20833.

As we know that employee contributes 12% of basic as per EPF scheme rule. This means if your basic salary is more than 173608 Rs (1.73 lakh) your monthly EPF contribution would exceed Rs.20833.

173608*12/100 = 20833

If your basic salary is above 1.73 Lakh you need to pay tax on the interest earn.

Case 2 – Voluntary EPF Contribution by Employee

The rule discussed in the case 1 is also applicable here. Your monthly EPF contribution should be less than Rs.20833. Many employees opt of Voluntary EPF contribution to earn tax free return. But now in new provision it is not allowed.

So, if you have opted for VPF make sure you are not contributing beyond 2.5 lakh in year to your EPF account.

FAQ

From when this new rule is applicable?

The new rule shall apply to only those contributions made on or after April 1, 2021. Therefore, there is no change in tax rule for those contributions made until March 31, 2021. The new rule is applicable to employee contribution only. This rule is not applicable to employer’s contribution to EPF account.

What is the alternative if I have higher basic and my contribution is beyond 2.5 Lakh?

In case you have higher basic salary and your contribution in EPF is beyond 2.5 you need to ask your employer to offer NPS facility. If your employer is offering NPS you can opt for it and reduce your tax liability.

Why this rule is introduced?

The new rule is introduced in order to prevent misuse of old tax provision. There were many salaried people who are putting large sum of money in the EPF account via VPF route. People were exploiting loop hole in the system to earn tax free return. The new rule is introduced to prevent misuse of old rule.