While interest earned on contributions to Employees’ Provident Fund (EPF) contributions is tax-free for most of us, it is liable to be taxed if the interest exceeds a certain limit in a year. This amount is Rs 2.5 lakh. Any interest earned above this amount is taxed and TDS is collected on the excess amount.
For those who earn interest exceeding this ceiling, Employees’ Provident Fund Organisation (EPFO) maintains two separate accounts for a contributor – one for contributions up to Rs 2.5 lakh and the interest earned on it and the other for the excess which will be taxed.
The interest accruing to the taxable account will be added to the overall income of the taxpayer and taxed accordingly.
Scenario 1
Let’s take two examples. Suppose an employee makes an annual contribution of Rs 3 lakh in his PF account. Let’s proceed with the calculation assuming interest rate at 8.25%, the rate fixed for FY24.
Annual contribution: Rs 300,000
Rate of Interest: 8.25% per annum
Interest earned in a FY: 300,00 X 8.25% = Rs 24,750
Interest earned on the first Rs 2.5 lakh: Nil
Interest on the excess amount (Rs 1.5 lakh): Rs 1,50,000 X 8.25% = Rs 12,375
Therefore, interest on Rs 1.5 lakh, or Rs 12,375 is taxable.
It will be added to the overall income of the employee and he/she has to pay income tax accordingly.
Scenario 2
Let’s consider another scenario. In this case the employee makes a contribution of Rs 6 lakh to the PF account in a year or Rs 50,000 a month.
Employee’s contribution in a financial year: Rs 6 lakh
Rate of interest: 8.25% per annum
Interest earned: Rs 6,00,000 X 8.25% = Rs 49,500
Interest on the first Rs 2.5 lakh: Rs 2,50,000 X 8.25% = Rs 20,625 (this is tax-free)
Interest on rest Rs 3.5 lakh: Rs 3,50,000 X 8.25% = Rs 28,875 (this is taxable)
Therefore, in this scenario, Rs 28,875 will be added to the overall income of the taxpayer and taxed accordingly.
Not on employer’s contribution
One must remember that income tax is payable on the employee’s contribution only and not on the employer’s contribution. The objective is not to allow those with a high salary to go away enjoying a blanket tax-free status.
The Employee Provident Fund is the longest-running social security scheme for employees. Contrary to popular impression, it is not tax-free as a blanket policy. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
