Employees who have contributed more than ₹2.50 lakh to the Employees Provident Fund (EPF) during FY22 or will do so in the subsequent years will be liable to pay tax on interest even in case of death. Also, employees who are yet to link their EPF account with PAN or having invalid PAN will be subjected to Tax Deducted at Source (TDS) at a higher rate.

These and others are part of the new instructions issued by the Employees Provident Fund Organisation (EPFO) to implement Finance Ministry’s notification, dated August 31, 2021, related to the tax on interest on contribution exceeding ₹2.50 lakh in a financial year.

This year’s Budget had restricted tax exemption for the interest income earned on employees’ contribution to various provident funds on an annual contribution of ₹2.5 lakh. This is applicable only for the contribution made on or after April 1, 2021. Accordingly, new taxation rules have come into effect from the beginning of this month.

TDS applicability

According to the FAQs issued along with the EPFO instructions, one of queries is “Whether TDS will be applicable in death cases?” “Yes, TDS will be applicable in death cases as in the case of a live member,” says the answer. The FAQs also clarified that if the EPF account is linked with a valid PAN, rate of TDS will be 10 per cent, and if not, 20 per cent.

TDS will be applicable to exempted establishments and exempted trusts and also international workers as in the case of Indian workers. The effective date of TDS shall be first day of April or final settlement or transfers, whichever is later on case of final claim settlement. In all other cases, TDS will be deducted on the date of credit of interest.

How much to pay?

For the purpose of calculation of taxable interest, separate accounts within the provident fund account will be maintained for taxable and non-taxable contributions made by a person.

Taxable contribution account will be an aggregate of contribution in excess of the threshold limit (₹2.5 lakh) along with the interest accrued on that. Withdrawal will then be subtracted to arrive at the final figure. Non-taxable contribution account will be the aggregate of the closing balance in the account as on March 31, 2021, contributions during FY22 and subsequent years, minus the amount included in the taxable contribution and interest accrued on these two. Here, too, withdrawal will be subtracted.

General Provident Fund

Finance Ministry officials say the new rules will cover 1.22 lakh people whose income is more than ₹2 lakh a month, though it is just 0.25 per cent of all subscribers. The rules will also be applicable in case of General Provident Fund (GPF), but the threshold here will be ₹5 lakh as there is no contribution from employer there.