Majority of salaried individuals contribute 12% of their salary to Employee Provident Fund (EPF) account, and their employer matches their contribution. In addition, employees can voluntarily contribute up to 100% of their basic salary to the same EPF Account using VPF route. The overall contributions made to EPF account compounds, at a rate declared by the Employees’ Provident Fund Organization (EPFO) every year and this can be substantial amount for some.
Some of those who are just retired on attaining age of 58 years or those who are not working now or taken up employment with no EPF contribution/benefits , may not always withdraw the accumulated amount from the EPF account immediately. There can be various reasons why people do so, one such reason is EPF is safer than a bank & also on most occasions earns higher interest rates (8.65% for FY 18-19)
However, this amount remains a liability for the EPF Organization towards the account holder. To discourage provident fund subscribers from neglecting their EPF accounts, especially the ones in which no contributions are being made at all, in 2011 the EPFO stopped paying interest on accounts that had been inoperative for more than three years, or 36 months. But in 2016, the rule changed and the EPFO said that inoperative accounts will also earn interest till the account holder turns 58. But after the retirement of the account holder, the EPFO will not pay interest as the account becomes inoperative. However, there was an ambiguity about the taxability on interest earned on EPF balance post retirement.
In this context, a few years ago, a case was filed by Dileep Ranjekar (Ex.Wipro employee) at Income Tax Appellate Tribunal, Bangalore. Ranjekar didn’t withdraw his EPF corpus for about nine years after retirement. Believing that the EPF corpus is tax free on withdrawal. He also reportedly did not declare it in his income tax return or pay any tax in the year he withdrew the funds or anytime after his retirement.
However, after scrutiny of his ITR by income tax department, the interest earned on entire EPF corpus after his retirement was added to his income by assessing officer, and Ranjekar was asked to pay tax on the whole amount. Ranjekar filed an appeal against the order with commissioner of income tax, and reportedly got the result in his favor. However, the I-T department escalated the matter and filed an appeal with the IT tribunal. In its decision, tribunal stated that interest earned before retirement will not get taxed irrespective of when it is withdrawn after retirement, but any interest earned post retirement will be taxable in the hands of the account holder. This is because the exemption is available only to an employee. Once an individual leaves their job or retires, he or she does not remain an employee; hence, any interest earned during this period attracts tax.
If you plan to retain the EPF corpus, when there is no contribution to the EPF account or on attaining 58 years, you should start including such interest under “income from other sources” in the ITR. This way you may pay tax as per the prevailing year’s tax slab instead of likely maximum tax slab later.