Over a last two months, many employees received their annual hike or increment letters. This hike in salary leads to increase in the the amount that has to be contributed to the Employees’ Provident Fund (EPF) account. It is important to check how much contribution will be made to your EPF account because if the EPF account contributions exceed a specified limit, then interest earned from the excess contributions are taxable.
Rs 2.5 lakh cap on investment
If an employee’s own contribution to EPF and Voluntary Provident Fund (VPF) exceeds Rs 2.5 lakh in a financial year, then the interest earned on excess contribution will be taxable which was effective from April 01st, 2021 and will be taxed as per the income tax rates applicable to your income.
Government employees
If you are a government employee or an employee whose employer does not contribute to the EPF account, then the tax-exempt EPF and VPF contribution limit is Rs 5 lakh.
New guidelines for Taxable EPF
If the employee’s own EPF and VPF contribution exceed the specified limit Rs 2.5 lakh or Rs 5 lakh, then the interest earned on the excess contribution becomes taxable. Another EPF account will be opened to credit the interest earned on excess EPF and VPF contributions. This was clarified by the Central Board of Direct Taxes (CBDT) via a notification dated August 31, 2021.
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