PF Contributions Above ₹ 2.50 Lakh Will Be Taxed - EPFO Issues New Guidelines

TDS on interest earned on excess contributions above Rs 2.5 lakh has been made effective from April 1, 2022, says EPFO.

The Employees Provident Fund Organisation (EPFO) has released new guidelines on the taxation of interest received on EPF accounts with contributions exceeding Rs 2.5 lakh in a financial year.

According to an EPFO circular dated April 6, 2022, interest received on excess contributions would be subject to tax deduction at source (TDS) beginning April 1, 2022. The tax will be deducted when interest is credited to the EPF account. If a final settlement or transfer is currently pending, the tax will be deducted at a later date during the final settlement.

TDS on interest generated on excess contributions over Rs 2.5 lakh will be applicable in final settlements, transfer claims, or transfers from exempted organisations to EPFO and vice versa, according to the circular. They will also apply to transfers from one trust to another, as well as historical accumulation transfers and annual account processing, such as interest credit in EPF accounts.

The TDS would also apply to all EPF members, including those who are members of exempted establishments or exempted trusts.

If a member has made EPF contributions of more than Rs 2.5 lakh in a financial year, it will be applicable even if the person dies. According to the circular, it would also apply to international workers.

In addition, if the EPF account is linked to a valid PAN, tax will be deducted at a rate of 10%, or 20% otherwise. Even in the event of a member's death, the TDS rate would stay constant. Tax will be deducted at a rate of 30% for non-resident EPF members and international workers, according to the circular. Cess and fee will raise the TDS rate even further.

It's worth noting that, while interest is credited on an annual basis in EPF accounts, members' accounts are maintained on a monthly basis. If no transfers or final settlements are made throughout a fiscal year, tax is deducted when the interest is credited.

From fiscal year 2021-22, only the portion above the threshold limit, i.e. Rs 2.5 lakh, would be considered when calculating interest and TDS, according to the EPFO circular.

The non-taxable contribution account would also feature data of the opening amount, contributions below the Rs 2.5 lakh level, interest earned, and withdrawals made within the same time period.

Similarly, the taxable contribution account would keep track of contributions over Rs 2.5 lakh, as well as interest and withdrawals. The interest earned in the taxable contribution account will be taxed at the member's marginal tax rate.