Starting this financial year, your employees’ provident fund (EPF) statement will display two accounts within your provident fund account. One will capture the non-taxable portion of the employee’s EPF contribution, while the other will contain information about the taxable component, as per a Central Board of Direct Taxes (CBDT) notification. “For the purpose of calculation of taxable interest…separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person,” the circular stated.
However, this may not mean that you actually need to open two separate accounts; your EPF UAN (universal account number) will remain the same. “At present, the annual provident fund statement reflects your contribution with interest accrued, employers’ contribution and interest earned, along with amount earmarked for employees’ pension scheme (EPS). Now, under the employees’ contribution, they would possibly insert two more columns – excess contribution and the interest earned on this amount that will be taxable,” says Saraswathi Kasturirangan, Partner, Deloitte India.
Read on to understand how the interest income on your annual EPF contribution over Rs 2.5 lakh (Rs 5 lakh is the threshold primarily for government employees) will be taxed.
Rules framed for taxing interest on excess EPF contribution
In the Union Budget 2021, Finance Minister Nirmala Sitharaman had announced that the interest earned on employees’ contributions their provident fund in excess of Rs 2.5 lakh a year will be subject to tax. The government had then said that the move would affect less than 1 percent of tax-payers. That is, primarily high-earners whose basic annual salary is over Rs 21 lakh (Rs 1,73,612 a month). For government employees, this EPF contribution threshold is higher at Rs 5 lakh. This has come into effect from financial year 2021-22 (assessment year 2022-23).
Employers deduct 12 percent of your basic salary as your contribution to EPF every month, add a matching amount as their contribution and deposit it with the EPFO. If the amount deducted as your contribution is over Rs 2.5 lakh in a financial year, the interest earned on this excess amount will be taxed as per the slab rate applicable to you. If you have made any additional, voluntary contribution during the year, that will also be taken into account. Rules on implementation, however, hadn’t been framed so far.
PF statement could provide granular information
Now, the I-T department has prescribed two accounts within your PF account to capture the details. However, further clarity is needed. “As per the notification, this is going to be an additional line of clarification in the EPF passbook or statement. The additional line to hold the tax deducted value to be captured for better clarification to the EPF members. There is no requirement of any special notification or arrangement by the EPFO and employer respectively,” says Prashant Singh, Vice President and Business Head-Compliance Payroll outsourcing, TeamLease Services.
Others believe there will be two separate accounts within your PF account. However, an employee will not have to make additional effort to open any new accounts. “The onus of opening and maintaining two accounts – that is, (a) non-taxable for balance as on March 31, 2021 and further deposits of up to Rs 2.5/5 lakh per annum and (b) taxable for deposit over Rs 2.5/5 lakh is on the EPFO. No action or facilitation from employer or employee will be required. It will be an auto-transfer to taxable account,” explains Sudhir Kaushik, Co-founder and CEO, Taxspanner.com.
Additional compliance burden for all
All the stakeholders – employers, employees, EPFO and private recognised PF trusts - will need to revamp their strategies. As employees, you have will have to check the rate at which tax on interest has been withheld. “If the deduction rate is higher than the applicable rate (your final slab rate), you will have to apply for reimbursement of the same. If it is lower, then you will have to pay the additional tax,” explains Singh.
EPFO, too, might have to revamp its statement format. “The trust will have to monitor the contribution, decide the tax rate, ensure that it is reflected in the passbook of the employee and remit the same to income tax department against the PAN of the employee,” says Singh. Employers might have to carry out audits to ensure that the calculations are as per the rules. “This will be an extra administration hassle for sure,” says Singh.
Further clarity awaited
EPFO authorities will have to put in place a system to capture all the information related to interest earned on excess contributions. “The intent appears to be that the PF authorities and PF trust will have to capture additional information relating to PF contributions which trigger taxable interest. Will they have to revamp their system to capture this information? Also, the interest credit to PF accounts come in late. Hence there needs to be clarity on whether the remittance of tax will be left to employees or will PF authorities or PF trusts be required to withhold tax payable at their end ,” points out Saraswathi.The TDS rate, if any, has not been specified. Post Budget announcements, Kamlesh Varshney, joint secretary, tax policy division at the CBDT had said that the taxability will be similar to that of interest income on fixed deposits. Banks deduct 10 percent tax (tax deducted at source) on the interest that is accrued on fixed deposits. If the taxpayers’ tax slab is higher than 10 percent then they pay advance tax, but taxpayers get a refund if tax liability is less than 10 percent, he is reported to have said. It is not clear if a similar approach is going to be adopted in case of EPF contributions too.