The new tax rules on interest on EPF savings explained in 7 points


The Employees Provident Fund Organization (EPFO) earlier this month announced an interest rate of 8.1% on accumulations of EPF or Employees Provident Funds in members’ accounts for the fiscal year 2021-22, compared to 8.5% the previous year. Interest on the EPF was fully tax-free in the hands of provident fund contributors until changes were introduced in the 2021 budget, effective April 1, 2021. Accrued interest on the contribution to the EPFs above a particular threshold will be taxable.

For calculation purposes, separate accounts within the provident fund account will be maintained from 2021-2022 and all subsequent years for taxable contributions and non-taxable contributions made by an individual, the tax experts say. In other words, the provident fund or the employee provident trust will hold two accounts for this purpose: one with contribution within the threshold and the other (second) for contribution above the threshold.

How the new FPE interest tax rules will apply:

1) Under the new rules, any interest credited to an employee’s provident fund account will only be tax exempt for contribution up to 2.50 lakh each year and any interest on employee’s contribution above 2.50 lakh will be taxed in the hands of the year of the employee. after year. In the event that the employer does not contribute to the employee’s provident fund, then the applicable threshold will be 5 lakh of employee contribution, according to tax expert Balwant Jain.

2) The The 5 lakh limit covers about 93% of EPFO ​​subscribers and they will continue to enjoy non-taxable interest assured, according to the interest rate announced each year by EPFO.

3) The employer pays 12% of the base salary plus the high cost allowance to the EPF and deducts an additional 12% from the employee’s salary; 8.33% of the employer’s contribution goes to the Employees Pension Scheme (EPS) which pays no interest.

4) “Please note that it is the interest on the excess contribution that will become taxable and not the contribution itself. The excess contribution cannot be taxed because the contribution is made by the employee from his salary which is already taxed,” Jain added.

5) With respect to an employee’s credit balance as of March 31, 2021, interest on this non-taxable account will continue to be tax-exempt.

6) It is the interests of the second account (taxable) that will be taxed each year.

7) For the second account (taxable), it is not only for the year of contribution but also for all the following years that the interest will become taxable, specifies Mr. Jain.

To subscribe to Mint Bulletins

* Enter a valid email address

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our app now!!

Source link


About Author

Comments are closed.