As per the latest guidelines from EPFO, there are some new changes on income tax rules on EPF accounts. The latest tax rule on interest from EPF Savings will be applicable from April 2022.
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Latest Income tax rules on Interest from EPF Savings
#1. Interest on EPF account will be tax free
Interest credited on EPF account for contribution ( employee contribution) up to 2.5 lac will be tax free in employees hand.
#2 Interest on excess amount will be taxable
Post budget 2021, effective from April 2021, the interest accrued on EPF contribution beyond a particular threshold will be taxable in nature.
Explanation :The employer and employee both contribute 12% of basic and DA to EPF account.
Because of safety and high return of EPF, many contribute above 12% to their EPF savings. Here, as per the new EPF rules , the interest over the excess payment ( more than 12%) will be taxable. Please note entire amount will not be taxable but only the interest over this excess contribution will be taxable.
#3 Two separate accounts within EPF account
Now onwards two separate accounts within your EPF account will be maintained starting from 2021-22 and subsequent years for taxable and non taxable contributions.
As per the new rules, contributions up to 2.5 lac every year will be tax free in employees hand whereas contributions above 2.5 lac will be taxable in nature. To make it easier for calculation purposes the EPFO will maintain two accounts within EPF so as to separate taxable and non taxable contributions.
#4 Increased taxable limit If Employer does not contribute
In case the employer does not contribute to EPF then non taxable contribution will be 5 lac of employee contribution.
#5 Outstanding balance on 31st march 2021,
The outstanding balance of an employee as on 31st march 2021, interest on this non taxable account will remain tax free.
#6 Interest on second EPF account
The interest on the second account ( excess than 12% account) will be taxed every year. This account interest will be taxable in subsequent years also.
#7 Interest rate for EPF
The latest interest rate for EPF will be 8.1%. Earlier to this the interest rate was 8.5%.
The employer and employee both contribute 12% of basic and DA to the EPF account. Here 8.33% from employer contribution goes to EPS which earns no interest.
