Find out taxable EPF Interest with this calculator

Published: February 3, 2021 at 1:20 pm

Last Updated on February 4, 2021

Use this free calculator to find out the taxable EPF interest on employee contributions over 2.5 lakhs. This exact calculation is a follow up on this simple illustration: How employee contributions over 2.5 lakhs get taxed like an FD.

If you wish to avoid this tax, you can consider alternatives discussed in this article: With PF employee contributions taxable above 2.5 lakhs where else can we invest?

Considerations: Employer contributions or EPF balance is not relevant for computing taxable EPF interest. Suppose the annual interest rate is 8%,. EPFO provides a monthly interest of 8%/12 on the previous months closing balance.

Thus, interest for the month of May will depend on April closing balance and so on. This presents an issue for tax computation. If we contribute to EPF or VPF in March, the interest for that contribution will be provided only in the next financial year.

However, since tax to be paid depends on the contribution made in a financial year, this calculator will use compute Feb interest for Feb contribution and Mar interest for March contribution to keep it simple. Using this convention will make this easier for the tax-payer.

Inputs (to be made in green cells): Annual EPF interest and monthly (April to March) employee contributions to EPF + VPF.   Suppose your monthly EPF contribution is Rs. 20,000 and you added Rs. 50,000 in June via VPF, the entries will be as follows:

MonthEmployee contribution

This is a screenshot of the calculator.

Screenshot of the Taxable PF contribution calculator with results
Screenshot of the Taxable PF contribution calculator with results

NOTE: This sheet will only compute taxable EPF interest in the year of contribution. Is the interest earned on excess PF contribution (>2.5 lakh) taxable in future financial years also?

I was under the impression it is not, but many disagreed with me. These are the exact words of the finance bill 2021 (page 34)

“Provided that the provisions of this clause shall not
apply to the income by way of interest accrued during the
previous year in the account of a person to the extent it
relates to the amount or the aggregate of amounts of
contribution made by that person exceeding two lakh and
fifty thousand rupees in any previous year in that fund, on
or after the 1st day of April, 2021 and computed in such
manner as may be prescribed;”

This can be interpreted as “interest earned on contributions made above 2.5 lakh in one financial year will be taxed in every subsequent year after 1st April 2021 until maturity”

This means: Suppose a person invested  Rs. 50,000 extra in a recognised PF. For 8% PF rate, the interest in the FY year of investment is Rs. 4000 (this depends on which month the amount is invested as shown in the calculator but we will keep it simple here)

In the next financial year if no extra contribution is made, this Rs 50,000 + Rs. 4000 =.Rs. 54,000 will earn an interest of Rs. 4320. If the above interpretation (sentence in red) is correct, then this Rs. 4320 will also be taxable. Interest earned in subsequent financial years will also be taxed. This is an illustration shared by Manmohan Sethumadhavan (Manu)

If this interpretation is correct then, users can refer to the additional sheet added to the calculator based on Manu’s sheet.

Update: The Central Board of Direct Taxes has now confirmed that the interest is taxable every year

Download the taxable PF contribution calculator (uploaded 3rd Feb 2021) For feedback or bugs write to freefincal AT Gmail.

Disclaimer: This sheet will only output the taxable EPF interest. We have done our best to use accurate logic and remove bugs and errors but no guarantee of accuracy can be made. If you notice an error please contact us via the above email.

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