A recent decision of the Income Tax Appellate Tribunal has clarified that the interest on Employees’ Provident Fund (EPF) accounts is taxable when it has been earned after the employee stops work. This stoppage can be due to retirement, resignation, dismissal or any other reason.
EPF Taxation – Background
Employer and employee contributions to the EPF are tax deductible up to Rs 1.5 lakh under Section 80C. The interest on the EPF account is announced every year by the Employees’ Provident Fund Organization (EPFO) and is exempt from tax. The withdrawal amount from the EPF is also tax-free. The current EPF interest rate is 8.65%.
What has changed
The EPF account continues to earn interest until you close it, regardless of your employment status. However, if you retire after the age of 55, the account only earns interest for a period of three years. Any interest you earn on your EPF account after your employment ceases, due to retirement or otherwise, will be taxable.
How does it compare to other options
The interest on the Public Provident Fund (PPF) is exempt from tax regardless of your employment status.
The taxation of NPS (National Pension System) returns is not related to your employment status. However, if you exit the NPS before the age of 60, you can withdraw only 20% of the accumulated corpus as a lump sum which will be taxable. The remaining amount must be used to buy an annuity. This annuity will also be taxed every year when it is paid out.