Taxation on EPF - can someone explain how it's gonna work?

[svs1957]

Starting April 2022, EPF+VPF contributions above 2.5L per finyear is gonna attract taxes.

My employee+employer contribution is about 70k per month (12% of basic salary). About 8.4L per year go to my PF account.

How is the tax calculated on this? Flat 30% on 8.4L or 30% on (8.4-2.5)L?

 

[revealedtruths]

@svs1957 Let me make it very simple.

You mentioned "employee+employer contribution is about 70k per month".

Forget employer contribution, it is taxfree and not affected by new rule. So you have to take just 35K PM which is employee contribution.

35K*12 = 4.2L Per year.

Now, this 4.2L will be split into two. 2.5L + 1.7L. This 2.5L and whatever interest it earns throughout it's lifetime will be tax-free. Whereas, any interest accrued by the remaining 1.7L is taxable year-on-year.

Hope it is clear.

 

[incognitoburrito]

@revealedtruths This is highly Flawed as a policy and arguable obiviously. EPF which is a long term safe item for retirement is not anyhow taken out without special reasons - paying Tax on interest when it's only due after long years is just insane.

Govt has just found better ways to milk the salaried clas and thats what this is.

The biggest anomally of Corporate Tax being 25% and Personal Tax almost coming to ~40% and then paying GST in the tune 28% is almost like bleeding thru nose if you are a salaried class in India.

Not evident now but this is actually a possible cause for People leaving there indian Citizenship which maybe called Brain Drain 2.0 after few years once govt wakes up.

 

[ranran19]

@revealedtruths While this is factually (nearly\)* correct answer and there may be two buckets / accounts within your EPF account moving forward, how they operationalize it would be very interesting and OP @svs1957, I would like to know how your employer / tax consultant / RPFO treated your taxable bucket. Please do inform us on this forum.

My concerns stem from the fact that we don't know for sure how much interest we are getting on the EPF account until about 6 to 10 months into the next FY, by when the deadline for ITR filing is already over. (This is because Labour & Finance ministries come to an agreement only a few quarters after the end of the FY and official notification takes a few days thereafter.) This is so unlike any other interest bearing instruments or bank accounts, where the interest rates are known and interests are easy to compute and/or interest certificates are issued.

Would EPFO deduct TDS on the "taxed bucket" or does the employee have to separately pay taxes? Would there be an interest certificate issued? How should advance taxes be computed? Would taxes be payable on withdrawal vs on accrual?

I speculate that tax consultants may suggest you to go by the previous year's interest rate as a baseline for this year's interest computation, and then do a true-up during the next year's IT return. If this is what we are resigned to do, then managing taxes for this "taxed" bucket in EPF account is going to be a nightmare.

\* - The reason I put "nearly" as a caveat is because in the last para it seems to imply that 2.5L is now going to be tax-free.

This 2.5L and whatever interest it earns throughout it's lifetime will be tax-free.

This is incorrect. Only interest on it is tax-free. How much of the principal EE contri of 4.2L is tax-deductible depends upon other deductions that employee avails. In any case, EE contribution can be tax-deductible only up to a max of 1.5L limit of 80C.

 

[stephen68]

@revealedtruths

Now, this 4.2L will be split into two. 2.5L + 1.7L. This 2.5L and whatever interest it earns throughout it's lifetime will be tax-free. Whereas, any interest accrued by the remaining 1.7L is taxable year-on-year.

This seems to be a nightmare to calculate on a year on year basis ... just imagine that in 2025-26, you have to calculate all the amount over 2.5L for the last 4 years and see how much interest you earned and add that to the income ... seems almost impossible!!!

 

[misha777]

@stephen68 Most Probably the amount in excess of 2.5L will be kept in a seperate account and each years excess will be added here. So all you have to see is how much Total interest is added in that account.

Most probably the interest credited itself will be after deducting the tax portion.

 

[stephen68]

@misha777 AH ok .. In any case, I dont make so much .... so no worries for me!

 

[revealedtruths]

@misha777 Yeah, separate account is the way to go. That was the idea I guess, will have to wait for few more months to see how it pans out

 

[solomonhezekiah]

@misha777 Yes. It's kept in a separate bucket. Effectively, there will be two sub accounts in the EPF
- Taxfree (Annual contributions up to 2.5 L will go here)
- Taxable (anything more than 2.5 L will be added here)

 

[svs1957]

@revealedtruths This certainly clears things up for me. Thanks a lot.

 

[revealedtruths]

@svs1957 Anytime

 

[pokerbob]

@revealedtruths This is the best explanation possible

This is absolutely correct.

 

[missylayne]

@revealedtruths Go up!

 

[exodus20]

@svs1957 Man I ve got two questions for you. What do you do? And how do you do it?

 

[shemaiah]

@svs1957 It's on the amount beyond the 2.5 lakhs and I think only employee contribution is taxed not employer. And you don't pay tax on the contribution instead on the interest it accures in its lifetime. Last time I checked it wasn't clear if taxes would be detected at source by creating two different buckets or the account holder had to file it seperately.

 

[svs1957]

@shemaiah Thank you!

 

[xamell]

@svs1957 There are 2 different taxes here:
1. Tax exemption on salary under 80C: This limit is 1.5L as of now. Whatever money you deposit above 1.5L won't be eligible for tax deduction (employee PF + VPF).

1. Tax emeption on interest accrued: Whatever money you contribute(employee PF+ vpf) above 2.5L will attract tax on interest. I'm guessing this tax has to be paid only when you withdraw the amount. You can do a rough calculation on amount of tax by assuming yearly interest to be ~8% or you can also assume net interest of ~8*0.7=5.6%.

 

[svs1957]

@xamell Thank you, kind sir.

 

[rajeduraj]

@xamell THanks

 

[resjudicata]

@xamell I believe the calculation for the net interest might be a bit wrong as (from what I understand from your comment) the tax is calculated only on the interest accrued.

For ex. If the principal is 10000 (I know technically this is below the 2.5L limit, just using the value for ease of calculation) and the ROI is 10%. Then after 4 years the corpus would be 14641 i.e interest would be 4641. Therefore the tax would be 4641*0.3 and the final corpus would be 13248.7 and thus ROI would be (1.32487)[sup]0.25[/sup] - 1=7.28% not 7 as your formula might have suggested.