EPF interest till ₹5L tax-free if employer does not contribute

It was announced in Budget 2021 that if an employee’s total contributions to his/her employees’ provident fund (EPF), voluntary provident fund (VPF) accounts exceeded 2.5 lakh in a financial year, then the interest earned on the contributions in excess of the limit will be taxable, the employee will bear the tax burden. Further, the budget said that in case there was no contribution by the employer to the EPF account, then interest earned from such accounts will be tax-exempt on deposits up to 5 lakh in a financial year.

However, after the introduction of defined benefit pension scheme (DBPS) in public sector banks insurance companies, employers are not required to make any contribution to the EPF accounts of those employees who are members of the DBPS.

Instead, a matching contribution on behalf of such employees is made to the pension fund set up for making pension payments to them upon retirement. In such cases, where there is no contribution by the employer to an employee’s EPF account, please confirm whether interest on EPF VPF contributions by employees who have opted for DBPS will be exempted from tax up to enhanced limit of 5 lakh or not.

—Praveen Godbole

We understthat in the instant case, employer’s matching contributions are made only to the specified pension fund for employees who are beneficiaries of DBPS.

No contribution is made by the employer to the recognized EPF account, while the employee continues to contribute to the EPF.

As per the Finance Act, 2021, interest accrued on contribution in excess of 2.5 lakh made by employee to the EPF from FY22 onwards shall now be taxable. However, in case there are no contributions made by the employer to such EPF accounts, then interest accrued on employee contribution in excess of 5 lakh will be considered taxable from FY22.

Accordingly, in the instant case, as the employer is not making any contribution to the employee’s EPF account, only the interest accrued on employee contribution in excess of 5 lakh in a tax year shall be taxable.

Please note that the rules governing the manner timing of computation of such taxable interest have not yet been prescribed.

Parizad Sirwalla is partner head, global mobility services, tax, KPMG in India.

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