Last Updated on February 5, 2021 at 4:00 pm
We had earlier reported that the Finance Bill 2021 has proposed that employee contributions over 2.5 lakh will be taxed as per slab. Here is a simple illustration of this works.
Update 1: Find out taxable EPF Interest with this calculator <= This is the exact calculation
Update 2: The Central Board of Direct Taxes has now confirmed that the interest is taxable every year
Assume that your EPF balance as on 31st March 2020 is Rs. 10,00,000. The employer contribution is, Rs. 20,000 a month; The employee contribution is Rs. 20,000 a month or Rs. 2,40,000 a year (FY).
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In this case, there is no change in rule and nothing need to be done. Suppose the employee decided to invest via VPF Rs. 5000 a month. The total annual contribution by the employee is (5000 x 12) + 2,40,000 = 3,00,000.
If the EPF rate is say 8% then 8% of (3,00,000 – 2,50,000) = Rs. 4000 should be shown as income while filing ITR and this will be taxed as per slab rate.
This interest any interest from future excess contributions will be taxed each financial year like a FD.
The EPF balance is also not relevant to this calculation. In effect, any contribution to the EPF by the employee (self + mandatory) above Rs. 2.5 lakh should be treated as a fixed deposit earning interest that will be taxed each year.