TDS will not apply to EPF balance till FY21: Here's what experts suggest

If EPF account is linked to PAN, 10% TDS rate will apply, else 20%

The Employees’ Provident Fund Organisation (EPFO) has issued guidelines on levying tax deducted at source (TDS) on interest earned from an EPF account where the contribution exceeds Rs 2.5 lakh in a fiscal year.

According to the April 6 circular, TDS deduction will begin from April 1.

On August 31, 2021, the Central Board of Direct Taxes had issued a notification specifying if contribution to the EPF exceeds Rs 2.5 lakh for non-government employees and Rs 5 lakh for government employees, then interest earned from such contribution would be taxable. The initial announcement was made in the Union Budget 2021.

According to Aditya Chopra, managing partner, Victoriam Legalis-Advocates & Solicitors, “The April 6 circular offers much-needed clarity on the calculation and deduction of tax.”

Gopal Bohra, partner, N.A. Shah Associates, informs that, according to the guidelines, the EPFO shall maintain separate accounts for taxable and non-taxable contributions.

Who will TDS apply to?

The new rule will apply to all EPF subscribers: unexempted establishments, exempted establishments, and exempted trusts.

Prashant Singh, vice-president and business head-compliance and payroll operations, TeamLease Services, says, “TDS will be applicable in case of Provident Fund (PF) final settlement, transfer claims, transfer from exempted establishments to the EPFO, and vice versa. It will also apply in case of transfer from one trust to another, and in case of death.”

This rule will also apply to international workers.

Who is exempted?  

TDS will not apply to the closing balance in the EPF account on March 31, 2021. Any contribution of up to Rs 2.5 lakh in 2021-22 (FY22), and subsequent years, will also be exempted. “When a member avails of partial withdrawal during FY22 and in future years, which brings down the quantum of contribution to Rs 2.5 lakh or less, in that case TDS will not be deducted,” says Singh.

Applicable rates

The TDS rate will depend on whether your PF account is linked to your permanent account number (PAN). “TDS will be deducted on interest earned. It will be 10 per cent for those who have PAN and 20 per cent for those who don’t,” says Singh.

Forms 15G and 15H can be submitted with a valid PAN to reduce the rate at which tax is deducted.  In the case of resident Indians, it will not be deducted if the TDS amount is up to Rs 5,000. 

In the case of non-resident Indians (NRIs), it will be deducted at the applicable rate, even if TDS amount is up to Rs 5,000. The TDS rate that will apply to NRIs is 30 per cent. In addition, a 4 per cent cess will also apply. A surcharge will apply if interest earned exceeds Rs 50 lakh, whose rate could range between 10 per cent and 37 per cent, depending on the interest amount.  

Says Suresh Surana, founder, RSM India, “If the double taxation avoidance agreement has been entered into with the NRI’s country, then a rate lower than 30 per cent will apply, according to the provisions of Section 90 of the Income-Tax Act.”

Will it apply retrospectively?

One question many people who contribute to the EPF are asking is whether TDS will be implemented with retrospective effect on past accumulation.

“No TDS will be applicable on past accumulation till March 31, 2021. It will only apply to contributions made from April 1, 2021, which exceed the threshold limit of Rs 2.5 lakh,” says Surana.

What experts suggest

Finally, check if your PAN is linked to your EPF account. “TDS will be deducted at a higher rate if your PF account is not linked to PAN, so every assessee should do so at the earliest,” says Surana.

Angad Sandhu, partner, PSL Advocates & Solicitors, suggests that on change in employment, members must get their PF accounts transferred to the new establishment by submitting Form 13(R). This can be done online through the member interface at the unified portal.