What changed: Interest credited on an employee's own contributions to a recognised provident fund (such as EPF) in excess of Rs 2.50 lakh in a financial year is no longer exempt; it is taxable as income from other sources. For employees whose employer does not contribute to the provident fund at all (a narrower category), the threshold is higher, at Rs 5 lakh. This rule applies only to the employee's own contributions; the employer's contribution to EPF (which is itself subject to a separate cap for perquisite purposes) and interest on the employer's contribution are governed by different provisions.
Who Does This Actually Affect?
For most salaried employees, annual EPF contributions (12% of basic salary plus DA, matched by the employer) stay well below Rs 2.5 lakh per year. This provision becomes relevant primarily for employees with high basic salaries, where 12% of basic plus DA exceeds Rs 2.5 lakh annually, and for employees who make substantial Voluntary Provident Fund (VPF) contributions on top of the mandatory EPF contribution, since VPF contributions are also employee contributions to the same recognised fund and count towards this threshold.
How the Taxable Interest Is Computed
The mechanism works by maintaining two notional accounts within the provident fund for tax purposes: a 'taxable contribution account' (tracking contributions above the Rs 2.5 lakh/Rs 5 lakh threshold made on or after 1 April 2021, plus interest on this account) and a 'non-taxable contribution account' (tracking everything else). Interest credited on the taxable contribution account is taxable as income from other sources in the hands of the employee each year it is credited, and TDS may apply on this taxable interest portion under the provisions applicable to interest income.
Worked Example
A senior employee with high basic salary plus VPFMr Sinha has a basic salary plus DA of Rs 2,40,000 per month, so his mandatory EPF contribution (12%) works out to Rs 28,800 per month, or roughly Rs 3.46 lakh per year. This already exceeds the Rs 2.5 lakh threshold by about Rs 96,000 per year. If Mr Sinha additionally contributes Rs 10,000 per month (Rs 1.2 lakh per year) towards VPF, his total employee contribution becomes roughly Rs 4.66 lakh, of which about Rs 2.16 lakh exceeds the Rs 2.5 lakh threshold. The interest credited on this excess Rs 2.16 lakh portion (accumulated year on year as the taxable contribution account grows) is taxable as income from other sources for Mr Sinha each year, while interest on the remaining Rs 2.5 lakh worth of contributions continues to be exempt as before.
Why This Mainly Targets High Earners and VPF Users
This provision was introduced specifically to address situations where high-income individuals were contributing very large amounts to VPF (which previously offered EPF-level interest rates entirely tax-free, with no investment cap unlike PPF's Rs 1.5 lakh annual limit), effectively using it as an unlimited tax-free debt investment. By capping the tax-free interest benefit to contributions up to Rs 2.5 lakh (or Rs 5 lakh for funds with no employer contribution) per year, the provision narrows this benefit while leaving ordinary EPF contributions for typical salaries unaffected.
Reporting in the ITR
The taxable interest portion (as communicated by the EPFO/trust managing the fund, typically reflected in the EPF passbook or annual statement with a breakup) needs to be reported under Income from Other Sources in the ITR for the relevant year, and any TDS deducted on this interest should be reconciled with Form 26AS/AIS.
Frequently Asked Questions
Does this rule apply to the EPF balance accumulated before this provision was introduced? ▼
The split between taxable and non-taxable contribution accounts applies to contributions made on or after 1 April 2021. Contributions and accumulated balances from before that date are generally not subject to this split, meaning interest on the pre-existing balance as of that date continues under the earlier (fully exempt, subject to other EPF withdrawal conditions) treatment. Only contributions made from FY 2021-22 onwards are tested against the Rs 2.5 lakh/Rs 5 lakh annual threshold.
If my EPF contribution exceeds the threshold in one year but not in another, how is the taxable account tracked? ▼
The taxable contribution account accumulates the excess contributions (over the threshold) for each year in which such excess arises, on or after 1 April 2021, along with the interest earned on that accumulated taxable balance. In years where contributions do not exceed the threshold, no new amount is added to the taxable contribution account for that year, but interest continues to accrue (and remains taxable) on whatever taxable balance has already accumulated from earlier years.
Does this provision affect PPF (Public Provident Fund) interest as well? ▼
No, this provision specifically concerns recognised provident funds in the EPF/superannuation fund category, which includes employee contributions through an employer. PPF, which already has its own statutory annual contribution cap of Rs 1.5 lakh and is governed by separate rules, is not affected by this EPF-specific Rs 2.5 lakh/Rs 5 lakh threshold provision, and PPF interest continues to be exempt under its own provisions, subject to the PPF scheme's own contribution limits.