The Employees Provident Fund Organisation (EPFO) has issued new guidelines pertaining to the deduction of tax on interest earned on EPF accounts where the contribution exceeds Rs 2.5 lakh in a financial year.
A circular issued by the EPFO on April 6, 2022 said that the interest earned on excess contributions will be subject to tax deduction at source (TDS), effective from April 1, 2022. The tax will be deducted at the time of credit of interest in the EPF account. In case there’s a pending final settlement or transfer, then the tax will be deducted at a later date during the final settlement.
According to the circular, TDS on interest earned on excess contribution above Rs 2.5 lakh will be applicable in case of final settlement, transfer claims, or, transfers from exempted organisations to EPFO and vice versa. They will also be applicable on transfer from one trust to another, past accumulation transfer, and at the time of annual account processing, i.e., credit of interest in EPF accounts.
Also, the TDS would be applicable to all EPF members, which includes members of exempted establishment or exempted trusts, as well.
It would be applicable even in case of death of the member if the member has made EPF contributions exceeding Rs 2.5 lakh in a financial year. It would also be applicable for international workers as well, the circular said.
Also, if the EPF account is linked to a valid PAN, then tax will be deducted at 10 per cent, or else at 20 per cent. The rate of TDS would remain the same even in cases of death of the member. According to the circular, for non-resident EPF members and international workers, tax will be deducted at 30 per cent. The TDS rate will be further increased by cess and surcharge.
It is important to note that, while interest in EPF accounts is credited on an annual basis, the members’ accounts are maintained on a monthly basis. If no transfers or final settlements are made in a financial year, then tax will be deducted at the time of crediting the interest.
According to the EPFO circular, for transfer, only the part above the threshold limit, i.e., Rs 2.5 lakh, will be considered while calculating interest and TDS, from fiscal year 2021-22.
Also, during the same period, the non-taxable contribution account will have details of the opening balance, contribution below the threshold of Rs 2.5 lakh, interest earned, and withdrawals made.
Similarly, the taxable contribution account will have details of contributions exceeding Rs 2.5 lakh, interest earned, and withdrawals made. Interest earned in the taxable contribution account will be taxable at the tax rates applicable to the member’s income.