EPF interest: Did your EPF interest become taxable after the last salary increases? Here’s how to check
From 1 April 2021 (i.e. from FY 2021-22), if an employee’s own contribution to EPF and Voluntary Provident Fund (VPF) exceeds Rs 2, 5 lakh in a financial year, interest earned on the excess contribution will be taxable. Interest earned on excess contributions will be taxed at the tax rates applicable to your income. The latest notified tax return forms for the 2021-22 fiscal year (AY 2022-23) require individual taxpayers to report and pay tax on interest earned on excess EPF and VPF contributions.
Thus, one must check not only for the current 2022-23 fiscal year, but also for the previous year, i.e. the 2021-22 fiscal year, to check if there is any taxable interest that must be declared in the ITR.
Here you can check if the interest earned on his EPF account is taxable.
How to check if EPF interest earned is taxable
The easiest way to check if EPF interest earned during a fiscal year is taxable is to check your payslips. Each month, your employer deducts your EPF contribution from the salary paid. In addition, if you have also opted for the VPF contribution, this deduction will also be reflected on your payslip. The EPF and VPF contribution indicated on your payslip must be multiplied by 12.
Let’s say your base salary is Rs 30,000 per month. Your employer will calculate your EPF contribution at the rate of 12% of your base salary. Your monthly contribution to the EPF account is Rs 3600 (12% of Rs 30,000). In addition, you have opted for a VPF contribution of Rs 3000 per month. Therefore, the monthly contribution to your EPF account is Rs 6,600.
You will need to multiply this monthly contribution to the EPF account by 12 (Rs 6,600X12). The total annual contribution paid to the EPF account will be Rs 79,200. Here, the annual EPF and VPF contribution you pay is below the mandatory limit of Rs 2.5 lakh. Therefore, interest earned on your annual membership fee will continue to be tax exempt.
In case of government employees
If you are a government employee or an employee whose employer does not contribute to the EPF account, the tax-free EPF and VPF contribution limit is Rs 5 lakh. This would mean that interest earned on EPF and VPF will remain tax-free if the employee’s own contribution does not exceed Rs 5 lakh in a financial year.
If the employee’s EPF and VPF contribution in a financial year exceeds Rs 5 lakh, interest earned on the excess contribution will be taxable.
If ETH interest becomes taxable
If the employee’s own EPF and VPF contribution exceeds the specified limit, Rs 2.5 lakh or Rs 5 lakh, as the case may be, interest earned on the excess contribution becomes taxable. Another EPF account will be opened to credit interest earned on excess EPF and VPF contributions. This was clarified by the Central Commission for Direct Taxes (CBDT) via a notification dated August 31, 2021.
For the purposes of calculating the taxable interest of EPF and VPF contributions, a separate account with the provident fund will be maintained during and from the financial year 2021-22. Additionally, all contributions made through March 31, 2021 will remain tax-exempt.
If interest earned on EPF and VPF contributions paid becomes taxable either in the previous year (fiscal year 2021-22) or in the current year (fiscal year 2022-23), this interest will be reflected in the account Newly opened EPF.