With regard to EPF and Interest there on -certain changes

The Finance Act, 2021 introduced significant changes regarding the taxation of interest earned on contributions to the Employees' Provident Fund (EPF) and other recognized provident funds. These changes were aimed at preventing high-income earners from claiming tax exemptions on large contributions.

Key Changes

• Tax on Interest: Effective from April 1, 2021, interest accrued on an employee's contribution to a Provident Fund is taxable if the annual contribution exceeds a specific threshold.

• Threshold Limits:

  • Standard Limit: The interest earned on the portion of an employee's contribution that exceeds ₹2.5 lakh per annum is subject to income tax.

  • Higher Limit (No Employer Contribution): If there is no contribution made by the employer to the provident fund, the threshold limit for tax-free interest is increased to ₹5 lakh per annum.

• Calculation: To implement this, separate accounts must be maintained within the provident fund for "taxable" and "non-taxable" contributions. Interest on the taxable portion (the excess contribution) is calculated and added to the employee's total income, where it is taxed according to their applicable income tax slab.

These rules were introduced under Section 10(11) and 10(12) of the Income-Tax Act, 1961, and further clarified by the Income-tax (25th Amendment) Rules, 2021 (specifically Rule 9D).

Summary: Since April 1, 2021, interest earned on annual EPF contributions exceeding ₹2.5 lakh is taxable. This limit is raised to ₹5 lakh in cases where the employer makes no contribution to the fund.