Interest on employee contributions to EPF now taxable!

According to the Finance Bill presented on Monday, the interest earned on any contribution above Rs 2.5 lakh by the employee on contributions towards recognised provident fund would be taxable with effect from April 1, 2021. These contributions would include the mandatory as well as the voluntary contribution from the employee’s end. Therefore, any interest earned on the excess of Rs 2.5 lakh contribution would be added to your income and would be taxed as per the respective income tax slab rate. 

Say, for instance, if your contribution towards Employees' Provident Fund (EPF) is Rs 3 lakh and the interest earned is 8 per cent then, the taxable amount would be Rs 4,000 (8 per cent of Rs 50,000 i.e., Rs 3 lakh less Rs 2.5 lakh) would be added to your income. Having said, who should worry about it? Employees with basic pay plus dearness allowance above Rs 1.74 lakh per month. And for employees, whose income is lower than that, there is no tax on the interest of their EPF contributions. According to the budget memo it was done because “instances have come to the notice where some employees are contributing huge amounts to these funds and the entire interest accrued/received on such contributions is exempted from tax under clause (11) and clause (12) of section 10 of the Act.” 

Now, how will this work? Say, for instance, your total employee contribution is Rs 5 lakh then, you need to calculate the interest on the contribution amount, which is in excess of Rs 2.5 lakh. In our case, it would be Rs 2.5 lakh (Rs 5 lakh less Rs 2.5 lakh). Say, the rate of interest is 8 per cent then, the taxable amount is Rs 20,000, which would be added to your income. Having said, the additional interest on this amount is not taxable in the subsequent year. This has been made clear in the Budget. It says, “provisions of these clauses shall not apply to the interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of the contribution made by the person exceeding two lakh and fifty thousand rupees in a previous year in that fund, on or after April 1, 2021, computed in such manner as may be prescribed.”