Any contributions made by an individual till March 31, 2021, will be considered non-taxable contributions. Further, from FY 2020-21, interest will be separately calculated on both these EPF accounts.
The CBDT notification stated that these rules will come into effect from April 1, 2022. Thus, tax on the interest earned on excess contributions in FY 2021-22 will be payable by you and you will need to declare it in your next year income tax return filing.
The Rs 2.5 lakh threshold is meant for non-government employees. In the case of government employees, the applicable threshold is Rs 5 lakh, i..e, interest will be taxable in the hands of the employee if contributions to EPF and VPF exceed Rs 5 lakh in an FY.
The Budget announcement in February 2021 did not provide clarity regarding how the taxable interest will be calculated and separated from the non-taxable portion. The latest CBDT notification throws light on how the taxable interest will be calculated.
Here is what the notification states:
Calculation of taxable interest relating to contribution in a provident fund or recognised provided fund, exceeding specified limit.- (1)For the purposes of the first and second provisos to clauses (11) and (12) of section 10 , income by way of interest accrued during the previous year which is not exempt from inclusion in the total income of a person under the said clauses (hereinafter in this rule referred to as the taxable interest), shall be computed as the interest accrued during the previous year in the taxable contribution account.
(2) For the purpose of calculation of taxable interest under sub-rule (1), separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person.
(a) Non-taxable contribution account shall be the aggregate of the following, namely:- (i) closing balance in the account as on 31st day of March 2021; (ii) any contribution made by the person in the account during the previous year 2021-2022 and
subsequent previous years, which is not included in the taxable contribution account; and (iii) interest accrued on sub- clause (i) and sub- clause (ii), as reduced by the withdrawal, if any, from such account; (b) Taxable contribution account shall be the aggregate of the following, namely:- (i) contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit; and (ii) interest accrued on sub- clause (i), as reduced by the withdrawal, if any, from such account; and
