On 6 April 2022, the Employees’ Provident Fund Organisation (EPFO) stated guidelines on the imposition of ‘Tax Deducted at Source’ or TDS on the interest earned in an Employee Provident Fund (EPF) account in which contributions are more than INR 2.5 lakhs in the financial year. This will be effective from 1 April 2022.
 
In August 2021, the Central Board of Direct Taxes or CBDT reported that if and when contributions to the EPF is more than INR 2.5 lakhs for non-government employees and INR 5 lakhs for government employees, then these contributions will be subject to taxation. This was a policy decision taken in the Union Budget 2021.
 
 

What is EPF?

Employees’ Provident Fund is a retirement benefit scheme which is maintained by the EPFO. Contributions to the EPF scheme are made in equal proportions by the employee and employer, on a monthly basis, at the rate of 12% on the basic salary and dearness allowance. 8.33% of the employer’s contribution is directed towards the Employee Pension Scheme or EPS. EPFs ensure that funds are available in case one retires or stops working temporarily or permanently for any other reason, including, but not limited to retirement.
 

What is TDS?

Tax Deducted at Source or TDS is a tax amount delivered to the Income Tax Department, which is reduced/deducted when a certain payment such as salary, commission, rent, interest, fees, etc. is made. Usually, the person who receives the payment/amount is liable to pay the tax. However, alternatively, the Government and its regulations often ensure that TDS is deducted in advance, i.e., before the final payment and the recipient only receives the net income. The recipient will add the gross amount to their income and the amount of TDS is adjusted against their final tax liability at the end of the financial year.
 
 

Key Changes Introduced from 1 April 2022

 
The following are the key takeaways from the new regime:
 

Who will TDS apply to?
 

• TDS on EPF will be applicable in case of final settlement, transfer claims, transfers from exempted organisations to EPFs and vice-versa, transfer from one trust to another, etc. This will be applicable to all EPF holders/members, including those of exempted establishments/trusts.
• It will also be applicable in case of death of an EPF holder in case the contributions exceed INR 2.5 lakhs in the FY.
• It will apply to international employees also.
• For those EPF accounts exceeding INR 2.5 lakhs, a separate account will be opened in accordance with the directions of the CBDT. The interest earned in this separate account will also be taxable at EPF rates and will be subject to TDS.

 

Applicable Rates

• The circular issued by the Government states that if the EPF account is linked to a valid Permanent Account Number or PAN, then the TDS rate will be 10%; if not, it will be double, i.e., 20%.
• In cases involving death, the rates will remain the same.
• In case of non-resident or international workers who are EPF members, TDS will be deducted at 30%. This may further rise due to additional cess and surcharge rates.

 

Exemption from TDS on EPF

According to the EPFO, following are the instances when TDS will not be deducted on EPF accounts:

• Transfer of EPF funds from one account to another.
• Termination of service/employment due to member’s illness, employer’s decision to cease business, conclusion of project, or any other reason beyond the scope of the member’s control.
• If an employee withdraws his or her EPF after a five-year period.
• If the EPF payment is less than INR 50,000 but the member has less than 5 years of service.
• If an employee with less than 5 years of service withdraws an amount greater than or equal to INR 50,000 but submits Form 15G/15H along with their PAN.
• TDS would be applicable only to the closing balance in the EPF as on date 31 March 2021. Any contribution of INR 2.5 lakhs in FY 2021-22, and the following years, would be exempted. Thus, if a member avails a partial withdrawal that brings the contribution down to INR 2.5 lakhs or less during the FY 2021-22, no TDS will be deducted.

 

Retrospective Applicability

 
TDS will not apply to EPF balance till FY 2020-2021, i.e., till the balance on 31 March 2021. Therefore, no TDS will be applicable to accumulations pre 31 March 2021 and it will only apply to contributions made from 1 April 2021, which exceed the INR 2.5 lakh threshold.
 
There is no retrospective applicability.
 
 

Linking PAN with EPF Account

 
To avoid paying a higher interest on your EPF, as mentioned above, here is how one can link the account to PAN:

• Step 1: Login to the EPFO portal with your ‘Universal Account Number’ (UAN) credential allotted by the EPFO.
• Step 2: Under the ‘Manage’ tab, click on the KYC option.
• Step 3: A new page will emerge where you link PAN with EPF account.
• Step 4: Enter your name and the PAN.
• Step 5: Save.

 

Conclusion

EPFs are crucial for saving up for a rainy day. The new tax regime on EPFs makes it imperative on employees to comply with the rules and link their EPF accounts with their PAN. This will ensure low tax rates and possible benefits as and when the account is utilized.

Taxpayers must carefully examine exemptions on EPFs to maximize their benefits, whilst ensuring that they are on the correct side of the Income Tax authorities. The fact that this tax regime will not apply retrospectively is a positive for EPF holders.
 

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