In union budget 21 The Honourable the Finance Minister announced a proposal to restrict tax exemption for the interest income from EPF for the high income employees.
Interest earned on EPF contribution above 2.5 lacs is taxable at normal rate for an employee.
If an employee contributes more than ₹. 2.5 lacs towards provident fund in a financial year, then interest earned on excess amount (Contribution- 2.5 lacs) will be taxable at normal rate.
|PF WAGES||8 lacs||8 lacs||24lacs|
|Tax-free Amount |
|Taxable Amount |
|Tax-free Interest (8.5%)||₹8160||₹21250||₹21250|
|Taxable Interest (8.5%)||₹0||₹12750||₹3230|
Employee A of above mentioned table contributes ₹. 96000 towards EPF that is 12% of his annual wages ₹. 8 lacs. Hence the EPF contribution is less than 2.5lacs then interest on 96000 that is 8160 is tax-free.
But employee B contributes 50% of his annual wages(8 lacs) that is 4 lacs. Hence here the EPF contribution is higher than exampted limit (2.5lacs) so interest earned on excess amount 1.5 lacs (4 lacs- 2.5 lacs) is taxable that is 12750. He has to pay income tax on 12750(interest) at normal tax rate.
And now see the employee C. He contributes 12 % that is 288000. Here 38000 is excess amount. He has to pay income tax on 3230(interest) at normal tax rate.