In FY2021-22, I deposited ₹4.5 lakh in VPF. My share in EPF is ₹95,000 and the employer share is ₹80,000. I have not yet received the interest of FY2021-22 in my PF account. From FY 2021-22, there is a tax on interest of excess amount of PF after ₹2.5 lakh. So what is the tax liability in my case for FY2021-22?
—Deepak Gupta
We understand that during FY2021-22, you have contributed ₹5.45 lakh towards the Employee Provident Fund (EPF) account ( ₹95,000 towards statutory EPF and ₹4.5 lakh as voluntary PF). Further, we have assumed that your PF account is maintained with Employees’ Provident Fund Organization (EPFO) and not through the private PF trust of your employer.
As per the provisions of the Income-tax Act, 1961, if EPF contribution by employee exceeds ₹2.5 lakh during the financial year, interest accrued during the year on such excess contribution will be considered as taxable income at the normal tax slab rates. There is a view prevailing that as interest is in the nature of income from other sources, it may be offered to tax as per the method of accounting regularly employed by the individual i.e. cash or mercantile. It is also debatable whether such interest is taxable on year-on-year or only on withdrawal.
As per the specified mechanism, separate accounts (for taxable contribution and non-taxable contribution made by a person) are to be maintained by EPFO within the individual’s PF account for interest on respective contributions.
The income tax rules clarifies that the withdrawal of income tax exemption is prospective (from 1 April 2021) as it grandfathers any interest on balance in EPF account as on 31 March 2021 by including it as a part of the ‘non-taxable contribution account.
Further, the EPFO circular dated 5 April 2022 has outlined the method of calculation and deduction of corresponding Tax Deduction at Source (TDS) by the payer. The said circular provides that the effective date of TDS shall be 1 April 2022 and tax shall be deducted at source on such interest income (i) At the time of credit of interest in the employee’s EPF account or (ii) Final settlement/transfer (whichever is later, in case of final settlement). Since the EPFO is yet to credit interest for FY2021-22 in the PF account, practically, it remains to be seen whether the interest income and corresponding TDS deducted thereon by the EPFO would be reported by them in FY2021-22 or FY2022-23. It also remains to be seen in which FY, the corresponding TDS shall reflect in the Form 26AS.
Hence, the employee may choose to report the interest income in the relevant FY. In case there is any mismatch between the FY of income reporting and tax deduction, the same would need to be explained/ reported accordingly.
In case you have already filed the tax return for FY2021-22, depending upon the FY in which the TDS entry is appearing in your Form 26AS, you may revise the tax return (if required) by 31 December 2022 to claim the credit of the TDS.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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