As per a circular issued by the EPFO on April 06, 2022, TDS on interest earned on excess contributions will be effective from April 1, 2022. The TDS will be deducted at the time of credit of interest in the EPF account. If there is a pending final settlement or transfers, then TDS will be deducted at a later date in the case of the final settlement.
Aakanksha Goel, Partner, T R Chadha & Co LLP, Chartered Accountants says, “The CBDT, vide notification dated 31st August 2021, provided that the interest relating to contribution in EPF funds exceeding Rs 2.5 lakh (for non-government employees) or Rs 5 lakh (for government employees) shall be taxable in the hands of EPF account holder. Regarding the same, EPFO, on 6th April 2022 has issued much-needed clarity regarding calculation and deduction of taxable interest relating to contribution in EPF exceeding specified limit. Detailed instructions about effective date, applicability of TDS on excess contributions such as at the time of credit of interest, transfer of EPF accounts due to job change etc., methodology of computing TDS along with illustrations under various circumstances have been given in the Circular. Information Services Division of the organization has also been advised to make necessary changes in the Application Software to implement the procedure of TDS deduction. The Circular issued by EPFO is self-explanatory. If the recommendations are implemented as prescribed, the deductees would not face any issue in relation to TDS deduction on excess contribution made by them.”
When will TDS on interest received on excess contribution be deducted?
As per the circular issued, TDS on interest earned on excess contribution above Rs 2.5 lakh will be applicable in case of final settlement, transfer claims, on transfers from exempted organisations to EPFO and vice-versa, on transfer from one trust to another, past accumulation transfer and at the time of annual account processing i.e., credit of interest in EPF accounts.
It will be applicable to all EPF members including members of exempted establishments/exempted trusts. The TDS will be applicable even in the case of death where the EPF member has made EPF contributions exceeding Rs 2.5 lakh in a financial year. Further, it will be applicable to international workers as well.
Do note that as per a notification issued by the Central Board of Direct Taxes (CBDT) on August 31, 2021, a separate account will be opened for those EPF contributions exceeding Rs 2.5 lakh. The interest earned on this portion will be taxable at the tax rates applicable to EPF members’ income and subject to TDS.
TDS rate on interest earned on excess contribution
As per the circular, if the EPF account is linked to a valid PAN, then TDS will be deducted at the rate of 10% or else double the rate of normal TDS, i.e., 20%. The rate of TDS will remain the same in death cases too.
For non-resident EPF members and international workers, the TDS will be deducted at the rate of 30%, stated the latest EPFO circular. The TDS rate will further be increased by cess and surcharges rates.
It is important to note that interest in EPF accounts is credited on annual basis, however, members’ accounts are maintained on monthly basis. Thus, if no transfers/final settlements are made during the financial year, then TDS will be deducted at the time of crediting of interest.
How TDS will be calculated on interest earned on excess contribution
To understand how TDS will be deducted on the interest earned on excess contribution, EPFO has given certain illustrations.
Suppose, Mr A’s monthly contribution to EPF account is Rs 30,000 (Rs3.5 lakh yearly). The closing balance of his/her EPF account on March 31, 2021 is Rs 50 lakh. The calculation of taxable & non-taxable portion of contribution will be as follows:
Period | Monthly Contribution (In Rs) | Cumulative balance at end of month | Interest accured @8.1% | ||
Non-taxable account | Taxable account | Non-taxable account | Taxable account | ||
Apr-21 | 30000 | 30000 | 0 | 203 | 0 |
May-21 | 30000 | 60000 | 0 | 405 | 0 |
Jun-21 | 30000 | 90000 | 0 | 608 | 0 |
Jul-21 | 30000 | 120000 | 0 | 810 | 0 |
Aug-21 | 30000 | 150000 | 0 | 1013 | 0 |
Sep-21 | 30000 | 180000 | 0 | 1215 | 0 |
Oct-21 | 30000 | 210000 | 0 | 1418 | 0 |
Nov-21 | 30000 | 240000 | 0 | 1620 | 0 |
Dec-21 | 30000 | 250000 | 20000 | 1688 | 135 |
Jan-22 | 30000 | 250000 | 50000 | 1688 | 338 |
Feb-22 | 30000 | 250000 | 80000 | 1688 | 540 |
Mar-22 | 30000 | 250000 | 110000 | 1688 | 743 |
Total | 360000 | 250000 | 110000 | 14044 | 1755 |
Thus, the amount available under taxable and non-taxable account on March 31, 2022 will be
Particulars | Non-taxable account | Taxable account |
Closing balance as on March 31, 2021 | 50,00,000 | 0 |
contribution during FY 2021-22 | 2,50,000 | 1,10,000 |
Interest accrued | 14044 | 1755 |
Total amount at the end of FY 2021-22 | 52,64,044 | 1,11,755 |
TDS @10% (where PAN is available) | 0 | 176 |
Opening balance as on April 1, 2022 | 52,64,044 | 1,11,580 |
How information will be shared on EPF account transfers
As per the EPFO circular:
a) When transfer is between one EPFO regional office to another
When an employee switches his/her job, he/she also transfers his EPF account from his/her previous employer to new employer. In such a case, details will be shared through Annexure-K. The detail of total taxable contribution along with its interest and TDS deducted (if any) will also be shared via Annexure-K. Further, opening balance and closing balance along with withdrawals (separately for taxable and non-taxable will also have to be shared).
b) Transfer from Exempted trust to EPFO
Exempted trusts are required to inform EPFO the month-wise employee contribution and TDS (if any) via Annexure-K. Similarly, opening balance and closing balance along with withdrawals (separately for taxable and non-taxable will also have to be shared).
Using this information, EPFO will arrive at the total employee share during the financial years effective from FY 2021-22 and interest thereof, against member’s EPF account and TDS amount after subtracting TDS which is already deducted/deposited while processing claim settlement/transfer of EPF accounts.’
c) Transfer from EPFO to exempted trust
Similar to the method above, EPFO will inform the above details to the exempted trust via annexure-K. Using the information received, exempted trusts will process the annual accounts/settlement/transfers of the EPF accounts.
d) Transfer from one exempted trust to another
Previous exempted trust will inform the current exempted trust about the month-wise share of the employee’s contribution and TDS (if any) deducted. This will be shared via annexure-K. Once the information is received, the current trust will arrive at the total employee share and interest thereof against the EPF account and TDS amount after deducting TDS which is already deducted/deposited. The exempted trusts will be required to deposit the balance TDS on interest in a taxable EPF account while processing annual accounts/transfers/ final settlement.
e) Past accumulation transfers
As per EPFO circular, in case of transfer from FY 2021-22, only the portion above the threshold limit i.e., Rs 2.5 lakh will be taken into consideration while calculating interest and TDS.
It is important to note that only the EPF portion exceeding the threshold limit of Rs 2.5 lakh to calculate interest and TDS
Details in taxable and non-taxable contribution account
Starting from FY 2021-22, the non-taxable contribution account will have details of the opening balance, contribution below the threshold of Rs 2.5 lakh, interest earned and withdrawals made. Similarly, the taxable contribution account will have details of contributions exceeding Rs 2.5 lakh, interest earned and withdrawals made.
Interest earned in the taxable contribution account will be taxable at the tax rates applicable to his/her income.