Still Believe Epf Interest Is Fully Tax Free? Expert Share It May Be Costing You More

Taxation of EPF: For galore salaried employees, nan Employees’ Provident Fund (EPF) has agelong been seen arsenic a tax-friendly measurement to build status savings. Both labor and employers lend a stock of nan employee’s net into this fund, which earns liking annually. Traditionally, nan full liking earned was tax-free. But nan rules changed successful Budget 2021, catching galore by surprise.

“People still presume each EPF liking is tax-exempt, but that’s nary longer true,” warns CA Himank Singla, a chartered accountant who precocious handled a lawsuit highlighting this overlooked taxation trap.

Consider 1 of Singla’s salaried clients who came successful for regular income taxation return filing for FY 2024-25. At first glance, his Form 16 showed nary issues—salary income, HRA, and modular deductions were each successful order. But a person look astatine his EPF passbook revealed a catch.

The client’s gross net was Rs 3 lakh per month. He contributed nan mandatory 12% of his basal salary to EPF, amounting to Rs 72,000 for nan year. Additionally, he chose to prevention much done Voluntary Provident Fund (VPF), contributing Rs 3.28 lakh extra.

This brought his full EPF+VPF publication to Rs 4 lakh for nan year—well supra nan tax-free ceiling introduced by nan 2021 amendment.

Here’s nan captious norm change:

From FY 2021-22 onwards, liking earned connected worker contributions exceeding Rs 2.5 lakh per twelvemonth is taxable nether “Income from Other Sources.”

For authorities labor pinch nary employer contribution, nan period is higher astatine Rs 5 lakh.

In Singla’s client’s case, Rs 1.5 lakh of nan publication exceeded nan Rs 2.5 lakh threshold. With an EPF liking complaint of astir 8.25%, this generated astir Rs 12,375 successful interest, which became taxable.

“And it’s not conscionable taxable,” Singla added. “It’s besides taxable to TDS if thresholds are crossed and must beryllium reported successful your ITR nether ‘Income from Other Sources.’ People deliberation it’s safe successful nan EPF account, but that doesn’t exempt it from tax.”

Importantly, this limit applies only to worker contributions. Employer contributions person their ain mixed ceiling of Rs 7.5 lakh annually nether Section 17(2)(vii), covering employer payments into EPF, NPS, and Superannuation Funds. Interest earned connected immoderate excess contributions is taxable nether a abstracted provision.

The takeaway for each salaried labor is clear:

Track your mixed EPF and VPF contributions.

Keep yearly worker contributions nether Rs 2.5 lakh if you want tax-free interest.

Understand that EPFO now maintains abstracted taxable and non-taxable accounts.

EPF remains 1 of India’s safest status tools. But post-2021, its tax-free position comes pinch strings attached. For those maximizing VPF contributions, observant taxation readying is now basal to debar unexpected taxation liabilities. 
However, nan PF magnitude withdrawn astatine status is tax-free, provided nan worker has made continuous contributions to nan EPF relationship for astatine slightest 5 consecutive years.