Why should you check your EPF contribution after salary hike
2 min read 16 Jul 2022, 11:19 AM ISTAs per income tax rules, if an EPFO members annual EPF contribution exceeds certain limit, EPF interest earned on amount above the given limit becomes taxable
PremiumIt is more than a quarter since we entered the new financial year 2022-23. So, most of the salaried individuals would have received their salary increment letters from their employers. As expected, employees must have seen the annual hike after receiving their salary increment letter. However, they are advised to look at the monthly Provident Fund (PF) deduction as well. As per the income tax rules, if an Employees' Provident Fund Organisation or EPFO member's annual EPF contribution exceeds certain limit then EPF interest earned on the exceeding amount will be taxable. In fact, the contribution amount exceeding the limit will be taxable as well.
As per the income tax rules, effective from 1st April 2021, if an employee's personal annual EPF contribution and voluntary provident fund (VPF) contribution together exceeds ₹2.50 lakh in one financial year, then in that case EPF interest earned on the contribution amount exceeding this ₹2.50 lakh limit and the amount exceeding ₹2.50 lakh annual limit will be taxable. This means, if a salaried individual has invested ₹3 lakh in one's EPF account in one financial year then EPF interest earned on additional ₹50,000 contribution will be taxable as per the income tax slab being applicable on the earning individual after addition of EPF interest and its net taxable annual income. This ₹50,000 is also taxable under new income tax rule.
In case of a government employees and EPFO members whose recruiters doesn't contribute to their EPF contribution, the maximum limit is ₹5 lakh.
How to check whether one's EPF interest is taxable or not?
After receiving the salary increment letter, an employee needs to go through the monthly salary break up and check about the monthly EPF contribution. After finding out the monthly EPF contribution, one needs to multiply by 12. If the outcome is more than ₹2.5 lakh, then in that case one's EPF interest earned above ₹2.50 lakh annual contribution will be taxable and the amount above ₹2.50 lakh being contributed in the EPF account would also be taxable.
As per the CBDT (Central Board of Direct Taxes) notification dated 31st August 2021, if an employee's annual PF contribution exceeds ₹2.50 lakh limit, then its another PF account will be opened where additional amount above ₹2.50 lakh will be deposited. It will make income tax department's job easier as both contribution amount and EPF interest accrued in the second PF account will be taxable.
Money task ahead
As per Section 80C of the income tax act, 1961, EPF contribution and interest earned on one's PF is exempted from the income tax. But, one can't claim more than ₹1.50 lakh annual contribution under this section. Hence, if an employee's EPF contribution is going beyond ₹2.50 lakh or ₹5.0 lakh per annum, then in that case one needs to look at other tax saving options like Section 80CCD, etc.
