The Buyt Desk
After the new rule on taxes on EPF, employees earning high salaries need to think twice before contributing more than Rs 2.5 lakh towards their EPF account.
In Budget 2021, new rules on taxation related to EPF contribution were announced. Now the employees contributing over Rs 2.5 lakhs per annum towards EPF will feel the pinch. The central government has declared the interest rate on employees’ provident fund (EPF) contributions of 8.1% for the financial year 2021-22. And this is the lowest to date. After this came another announcement of levying tax on the interest earned through the EPF account which was tax-free to date. Even now if the annual contribution is below Rs 2.5 lakh then the interest earned is tax-free but if the contribution to EPF is more than 2.5 Lakh then the excess contribution will be taxed. Both these announcements are not good news for employees contributing a heavy amount to EPF.
What are taxability rules on EPF?
In the Budget of 2021, it was declared that the interest earned on Employees’ Provident Fund contributions above 2.5 lakh will be taxed. Till March 2022, EPF was tax-free be it an investment, interest earned or even at maturity. Now on
What is a taxable and non-taxable account?
The Central Board of Direct Taxes (CBDT) says from now on the EPF statement will consist of 2 parts one being a taxable account and the other being a non-taxable account. And this is important for salaried people who contribute more than Rs 2.5 lakh per annum towards EPF/ VPF. Anything below Rs 2.5 lakh annually will not make any difference as it will be tax-free. All depositions made over the financial year which is less than Rs 2.5 lakhs come under a non-taxable account and any amount above Rs 2.5 lakh falls under a taxable account. The interest earned by a non-taxable account is tax-free whereas interest earned by a taxable account is taxable. Annually, at the end of the financial year, TDS is deducted from the interest earned by the taxable account before crediting the interest to the taxable account. When PAN is available, TDS is 10% else it is 20%. And TDS is 30% for non-resident employees (NRIs).
For non-taxable accounts, the business is as usual as the new taxation rule is not applicable. This rule is effective from April 1, 2022. At the end of the financial year, both taxable and non-taxable accounts will have a closing balance and the same will continue year on year. Every year where the deposit is above Rs 2.5 lakh, the balance of the taxable account increases and at the end of the financial year TDS is deducted before crediting interest. The employee will just deposit as he/ she did till now. All the calculations, the bifurcation between taxable and non-taxable contributions, interest and TDS workings will happen at the EPFO end. The segregation part is not an employee’s issue. At the start of every new financial year, the monthly deposits go to a non-taxable account until it reaches the mark of Rs 2.5 lakh and after that deposits go to a taxable account.
How will the taxable account work?
When your contribution exceeds Rs 2.5 lakh during the financial year, the taxable account comes into the picture. The excess (anything beyond Rs 2.5 lakh) deposit will go to a taxable account till the end of the financial year. The annual interest earned by a taxable account is deducted with TDS and then the deducted interest is added to the taxable account. The balance along with deduced interest added becomes the closing balance for the current financial year and the opening balance for the next financial year. The TDS on the interest of taxable income doubles if the employee has not furnished the PAN.
How will this new rule impact income tax filing?
If the employee has a balance in the taxable account of EPF, then there will be a tax deduction at the source. TDS can be either 10%, 20% or 30% based on different categories as discussed above. Though the TDS component is pre-populated in the income tax return forms, just be careful to recheck it. You need to take into account the interest earned through a taxable account under ‘Income from other sources and this will be taxed as per your tax bracket (slab). Not considering this component of a taxable account may lead to getting queries from the IT department.
How will withdrawals be treated and taxed for the same?
Any withdrawals made at any time of the year will be first deducted from the taxable account, only once the taxable account is exhausted, funds from the non-taxable account will be withdrawn. This rule is made so that employees will have less burden of the tax. Non-taxable is untouched during withdrawals until the taxable account has no balance.
