NEW DELHI: In the Union Budget 2021, the government had proposed taxing interest earned on the contribution to the Employee's Provident Fund (EPF) if the annual contribution exceeded Rs2.50 lakh. However, in the Finance Bill, 2021, passed by the Lok Sabha on Tuesday, the government has introduced an amendment to the rule and increased the limit on taxation of interest to Rs5 lakh, in cases where the employer is not making any contribution to the Fund.
Therefore, when an employee’s contribution exceeds Rs5 lakh in a year, the interest accrued will be taxed.
“The Finance Bill has been amended to direct that if any person makes a contribution to a fund in which there is no employer contribution, interest income accrued on account of employee’s contribution in excess of Rs5 Lakh shall be taxed," said Neha Malhotra, Director, Nangia Andersen LLP. "The amendment shall impact only the government-sector employees, who contribute to the statutory provident fund/ general provident fund."
Private sector employees will not get any relief under the new rule as both employers and employees contribute at least 12% each of basic wages to the Fund. They will have to pay tax as per provisions introduced in the Budget 2021.
“Private sector employees earning interest on Provident Fund on annual contribution exceeding Rs2.5 lakh would be required to pay tax on interest accruing on such excess contribution, for the government sector employees, the monetary ceiling shall be Rs5 lakh," said Malhotra.
In case of EPF, the interest income shall be taxable under the head 'Income from other sources'.
"Such income should be taxable as a residuary income as it is not accruing from a source emanating from an employer and employee relationship. The interest income will become part of the total taxable income of the taxpayer. There is no special rate for the taxability of this interest. Hence, such income shall be taxed at the prevailing income tax rates," said Taru Kumar, a Delhi-based chartered accountant.
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