According to the new rules, interest earned on contribution of Rs 2.5 lakh annually to the PF account of an employee will be tax-free. However, the interest earned on contributions above Rs 2.5 lakh will be taxed by the employee. Let’s know all the rules from the experts.
After the amendment made in the Finance Act 2021, the interest earned on the Provident Fund (PF) balance will now come under the purview of tax. This amendment has become effective from 1 April 2022. Prior to the amendment, interest earned on PF balance was fully exempt from tax under Section 10 of the Income Tax Act, 1961. According to this amendment, there is a provision of two conditions regarding the exemption limit. Rs 5 lakh for government employees (where the employer does not contribute to EPF) and Rs 2.5 lakh in case of other employees (where the employer also contributes to EPF).
New tax rules
According to the new rules, interest earned on contribution of Rs 2.5 lakh annually to the PF account of an employee will be tax-free. However, the interest earned on contributions above Rs 2.5 lakh will be taxed by the employee. If an employer does not contribute to the PF account of the employee, the applicable limit in this case will be Rs 5 lakh of the employee’s contribution.
Calculation wise, PF office or employee’s PF Trust will primarily maintain two accounts under PF account: Contribution within limit (Non-taxable contribution account) For contribution in excess of limit (Taxable contribution account)
Such accounts will have to be maintained for FY 2021-22 and subsequent years. Interest on additional contribution will be charged to tax and not to contribution. The balance amount in the EPF account as on March 31, 2021 will be part of the non-taxable account. Interest on non-taxable account will remain tax free as before.
Tax has to be paid every year on the interest earned on the taxable account. Accumulation of previous years in taxable account will be carried forward for subsequent years and interest earned thereon as well as interest earned on contributions made during the year will be taxed. TDS deduction on taxable PF interest
TDS (tax at source) will be deducted on such interest under section 194A of the Income Tax Act, 1961. As per this section, the payer of income is liable to deduct TDS. Hence the Provident Fund Office or EPF Trust will deduct TDS.
In case of resident Indians, the applicable TDS rate is 10%, but it requires that the PF account is linked to a valid PAN (Permanent Account Number). Otherwise it will be 20%. However, TDS will be deducted only if the interest amount exceeds Rs.5,000.
In the case of Non-Resident Indians (NRIs), 30% TDS will be deducted as per section 195 of the Income Tax Act. However, if the rates mentioned under Double Taxation Avoidance Agreement (DTAA) are beneficial, then such rates will be applicable. It is mandatory to link PF account with PAN. Otherwise, the applicable TDS rate will be 30%. 4% cess and surcharge at applicable rates is deductible along with TDS on payments to non-residents. However, if TDS is deducted as per DTAA provisions, these charges are not applicable.
Tax payable on PF interest
Tax is to be paid on the interest deposited in the taxable PF account during the year. Such interest should be included under the head ‘Income from other sources’. The tax is to be calculated as per the applicable tax slab rates. An individual can claim tax credit for TDS deducted from interest income.
