EPF Tax deduction: If an employee contributes more than Rs 2.5 lakh to the Provident Fund (EPF) in a financial year, then tax on interest on deposits above Rs 2.5 lakh will be calculated and will have to be paid.
EPF Tax deduction: Provident Fund means your money, which is being deposited for retirement. This money is especially important for the employed. But, many times people withdraw and reduce their deposit capital. At the same time, some believe that if you get more interest in it than other financial instruments, then more money should be invested. However, both things must be taken into consideration. Many people ask this question whether their EPF money is tax free? The answer is both yes and no. Actually, the interest received on the money above Rs 2.5 lakh deposited in the EPF account is taxed. From 1 April 2022, the government had changed the rules. That means from April 1, 2022, the interest earned on the money deposited in your EPF account is taxed. It has been kept in the category of TDS- Tax Deduction at Source. But, how is its calculation being done. It is important to understand this. How much and how will it affect you?
Mathematics of tax on EPF interest
The government has taken this step because of those who take maximum advantage of the provident fund account. A new provision was added in the Finance Act 2021. If an employee contributes more than Rs 2.5 lakh in a financial year to the Provident Fund, then tax on interest will have to be paid on the interest earned on deposits above Rs 2.5 lakh. Suppose if Rs 3 lakh is in the account, then the interest earned on the additional Rs 50,000 will be taxed. This will be based on the amount deposited in a financial year. Understand according to the table given below.
| Period | Monthly contribution (Rs) | Cumulative balance at the end of the month | Interest accrued at 8.15% in | ||
|---|---|---|---|---|---|
| Non-taxable account (Rs) | Taxable account (Rs) | Non-taxable account (Rs) | Taxable account (Rs) | ||
| April 22 | 30,000 | 30,000 | 0 | 204 | 0 |
| May 22 | 30,000 | 60,000 | 0 | 407 | 0 |
| June 22 | 30,000 | 90,000 | 0 | 611 | 0 |
| July 22 | 30,000 | 120,000 | 0 | 815 | 0 |
| August 22 | 30,000 | 150,000 | 0 | 1,018 | 0 |
| September 22 | 30,000 | 180,000 | 0 | 1,222 | 0 |
| October 22 | 30,000 | 210,000 | 0 | 1,426 | 0 |
| November 22 | 30,000 | 240,000 | 0 | 1,630 | 0 |
| December 22 | 30,000 | 250,000 | 20,000 | 1,697 | 135 |
| January 23 | 30,000 | 250,000 | 50,000 | 1,697 | 338 |
| February 23 | 30,000 | 250,000 | 80,000 | 1,697 | 540 |
| March 23 | 30,000 | 250,000 | 110,000 | 1,697 | 743 |
| Balance as on 31.03.23 | 250,000 | 110,000 | 14,121 | 1,755 | |
What is Rule 9D, in which there is talk of two provident funds
According to the new rules, two accounts are being maintained in the Provident Fund. First – taxable account and second – non-taxable account. Tax is calculated on the interest received on provident fund contribution (Tax on EPF contribution). Rule 9D lays down how the taxable interest will be calculated. Also, how to manage two accounts and what the companies have to do.
| Period | Monthly contribution (Rs) | Cumulative balance at the end of the month | Interest accrued at 8.1% in | ||
|---|---|---|---|---|---|
| Non-taxable account (Rs) | Taxable account (Rs) | Non-taxable account (Rs) | Taxable account (Rs) | ||
| April 22 | 40,000 | 40,000 | 0 | 270 | 0 |
| May 22 | 40,000 | 80,000 | 0 | 540 | 0 |
| June 22 | 40,000 | 1,20,000 | 0 | 810 | 0 |
| (As per below working) | -1,20,000 | 0 | 0 | 0 | |
| July 22 | 40,000 | 40,000 | 0 | 270 | 0 |
| August 22 | 40,000 | 80,000 | 0 | 540 | 0 |
| September 22 | 40,000 | 1,20,000 | 0 | 810 | 0 |
| October 22 | 40,000 | 1,60,000 | 0 | 1,080 | 0 |
| November 22 | 40,000 | 2,00,000 | 0 | 1,350 | 0 |
| December 22 | 40,000 | 2,40,000 | 0 | 1,620 | 0 |
| January 23 | 40,000 | 2,50,000 | 30,000 | 1,688 | 203 |
| February 23 | 40,000 | 2,50,000 | 70,000 | 1,688 | 473 |
| March 23 | 40,000 | 2,50,000 | 1,10,000 | 1,688 | 743 |
| Balance as on 31.03.23 | 2,50,000 | 1,10,000 | 12,353 | 1,418 | |
How to have two accounts in provident fund?
Now there will be two accounts in the provident fund. First – taxable account and second – non-taxable account.
Non Taxable: Understand that if Rs 5 lakh is deposited in someone’s EPF account, then under the new rule, the amount deposited till March 31, 2023, will be deposited in the account without tax. There will be no tax on this.
Taxable: If more than Rs 2.50 lakh is deposited in one’s EPF account in the current financial year, then the interest received on the excess amount will come under the ambit of tax. On this, the rest of the money will be deposited in the taxable account for calculation. Tax will be deducted on the interest earned in it. As shown in above table.
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