The annual appraisal season for salaried employees working in private companies is on. Many of the salaried individuals have already received their salary increment letters while many others are about to get them. Employees, who have received bumper appraisals should check their Provident Fund (PF) deduction details in the increment letters as tax rules apply if it crosses a certain limit.
According to the Income Tax rules, effective from 1st April 2022, interest earned from Employees Provident Fund (EPF) contribution over Rs 2.5 lakh in a year is taxable. For example, if an employee is contributing Rs 3 lakh to the PF account in a year. Then interest earned on contribution above Rs 2.5 lakh, i.e. Rs 50,000, will become taxable.
10% TDS is to be deducted from interest income on PF contributions over Rs 2.5 lakh. In case the PAN of the account holder is not available then TDS at the rate of 20% will be applicable.
However, no TDS will be deducted if the interest accrued is up to Rs 5000.
For calculation of the tax, the PF accounts of employees contributing more than Rs 2.5 lakh per year will have two parts – taxable and non-taxable, according to the Employees Provident Fund Organisation (EPFO).
“Taxable PF contribution account shall be the aggregate of the following: (a) Contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit. (b) interest accrued on(a) above,” the EPFO said in a recent circular.
The current rate of interest on EPF contribution is 8.1% per annum. As per the EPFO rules, an employee can contribute 12% of his salary (basic plus dearness allowance) to the EPF account. An equal amount is contributed to the account by the employer, of which 8.33% goes towards the Employees Pension Scheme (EPS) and 3.67% towards PF.