Typically, all salaried individuals contribute at least 12% of their salary to the Employees’ Provident Fund (EPF) account, and their employer matches the contribution. Employees can even voluntarily contribute up to 100% of their salary to EPF, but employers are mandatorily required to only match up to 12%. The contributions made to EPF then compounds at a rate declared by the Employees’ Provident Fund Organization (EPFO) every year. EPF earned an interest of 8.65% during financial year 2018-19. Not only is the interest that EPF offers usually higher compare to other fixed income instruments, contribution of up to ₹1.5 lakh to your EPF account also qualifies for tax deduction under Section 80C of the Income Tax Act, 1961. The interest accrued is tax free only after five years. If you keep your EPF investment intact till retirement, what you get on retirement is completely exempt from tax. But remember that if you delay withdrawing your EPF corpus, any interest earned on the EPF balance post retirement is taxable. Read on to understand why the amount becomes taxable.
Interest on EPF post retirement
Post retirement or after leaving the job, people often do not withdraw or delay withdrawing the accumulated amount from the EPF account. There can be various reasons why people do so, but it remains a liability for the EPFO towards the account holder. To discourage provident fund subscribers from neglecting their EPF accounts, especially the ones in which no contributions are being made at all, in 2011 the EPFO stopped paying interest on accounts that had been inoperative for more than three years, or 36 months. But in 2016, the rule changed and the EPFO said that inoperative accounts will also earn interest till the account holder turn 58. But after the retirement of the account holder, the EPFO will not pay interest if the account becomes inoperative.
But there was an ambiguity about the taxability on interest earned on EPF balance post retirement.
But in this context, a few years ago, a case was filed by Dileep Ranjekar in Income Tax Appellate Tribunal, Bangalore. Ranjekar was an employee of Wipro Ltd and didn’t withdraw EPF corpus for nine years after retirement. Believing that the EPF corpus is tax-free on withdrawal, Ranjekar did not declare it in his income tax return or pay any tax in the year he withdrew the funds.
However, after scrutiny of his ITR by income tax department, the entire EPF corpus was added to his income by assessing officer, and Ranjekar was asked to pay tax on the whole amount. Ranjekar filed an appeal against the order with commissioner of income tax, and got the result turned in his favour. However, the I-T department escalated the matter and filed an appeal with the tribunal.
In its decision, tribunal stated that interest earned before retirement will not get taxed irrespective of when it is withdrawn after retirement, but any interest earned post retirement will be taxable in the hands of the account holder. This is because the exemption is available only to an employee. Once an individual leaves their job or retires, he or she does not remain an employee; hence, any interest earned attracts tax.