EPFO has issued a Circular dated 06.04.2022 on the calculation and deduction of taxable interest relating to contribution in a provident fund exceeding the specified limit in accordance with the CBDT Notification No. 95/2021 in G.S.R. 604(E) dated 31.08.2021 which introduces a new Rule 9D in the Income-tax Rules, 1962 on the subject.
Finance Act, 2021 has withdrawn the exemption on interest income earned on Employees’ Provident Fund (EPF) on annual contribution in excess of Rs. 2,50,000. Hence any interest earned on PF Contribution on such excess amount of contribution is chargeable to tax and will be taxable under the head ‘Income from Other Sources’. Appropriate amendments have been made in sections 10(11) and 10(12) of the Income-tax Act. 1961.
Further, CBDT vide Notification No. 95/2021 in GSR 604(E) dated 31.08.2021 through Income-tax (25th Amendment) Rules, 2021 notified the rules to compute the interest on employees contribution to EPF and other provident funds exceeding Rs. 2,50,000 or Rs. 5,00,000, as the case may be, from FY 2021-22. For this purpose, a new Rule 9D is inserted for prescribing the methodology of computation of interest on the taxable portion of EPF contribution by the employees.
Read these previous articles on taxation of EPF interest
Exemption on Interest on EPF Contribution above Rs 2.5 Lakh Withdrawn
CBDT Notifies Rule 9D for Computation of Interest on Taxable Employees PF Contribution
Taxability of Interest on Employees Contribution to Provident Fund (PF)
The Circular, which is addressed to all the PF Commissioners, states that the interest relating to contribution in a Provident Fund exceeding specified limit of Rs. 2.50 Lakh shall be part of the taxable income of the subscriber.
The rules relating to deduction of tax (TDS) on the interest on taxable portion of PF contribution in excess of Rs. 2,50,000 shall be applicable from 1st April, 2022. Hence, the effective date of this Circular is 01.04.2022 for the financial year 2021-22.
The provisions relating to taxation on EPF contributions in excess of Rs. 2,50,000 in a year are effective from April 1, 2021. Hence, any contribution to EPF account will be bifurcated into taxable and non-taxable portion from FY 2021-22.
EPFO credits the interest for FY 2021-22 in the financial year 2022-23 and hence, the TDS on the interest accrued on the taxable portion of EPF contribution is required to be made in FY 2022-23. Hence, the effective date of TDS as per this circular is fixed as 1st April, 2022.
The TDS will be deducted on the date of credit of interest in the members’ EPF accounts.
The circular clarifies that TDS will be applicable in death cases also. International workers are also covered.
Recently, the Central Board of Trustees of EPF recommended 8.10% annual rate of interest to be credited on EPF accumulations in members’ accounts for the financial year 2021-22.
Two separate parts of PF Account for Taxable and Non-taxable contribution
As per the circular, the annual provident fund statement is now required to be maintained in two separate parts-taxable and non-taxable contribution accounts with effect from the financial year 2021-22 onwards.
The non-taxable contribution account starting from the financial year 2021-22 shall have the details of opening balance, contribution below the threshold, interest earned on such contribution and withdrawals made in the relevant year.
The taxable contribution account starting from the financial year 2021-22 shall have the details of the contribution made above the threshold, interest earned thereon and withdrawals made in the relevant year.
Interest earned on the taxable contribution account, being excluded from exempt income in terms of sections 10(11) and 10(12) will form part of the taxable income and will attract taxation at the applicable rates.
The EPFO will file an Annual Return as prescribed under section 285BA.
TDS provisions shall apply to the interest credited in the taxable contribution account as per the requirement of section 194A.
Methodology of Computing TDS
The Circular states that the taxable contribution part will be subject to a separate accounting of interest. The closing balance of this taxable portion will earn interest in the next year and will be subject to TDS, as per the current accounting system of EPFO.
Normally, interest is credited on annual basis except in certain cases where member accounts are maintained on monthly basis. For the purpose of TDS, the same is divided into two parts-
(i) Taxable
(ii) Non-taxable
Rate of TDS on taxable part of EPF contribution
The circular states that as per section 194A of the Income-tax Act, 1961, the rate of TDS is 10%, if the PF account is linked with a valid PAN.
If the PF account is linked with a valid PAN then the rate of TDS shall be 20% as per the provisions of section 206AA.
The rate of TDS shall be the same in death cases also.
The above rates are applicable for PF members who are ‘resident’ as per Income-tax Act.
For non-residents PF members, the rate of TDS shall be 30% under section 195. The TDS rates will be increased by a cess of 4% and an applicable surcharge if taxable interest income exceeds Rs. 50 Lakh.
The rate of TDS of 30% for non-residents members shall be subject to DTAA. In case the TDS rate is applicable as per DTAA, then cess and surcharge shall not apply. In order to avail the benefits under DTAA, non-residents will have to file a declaration in Form 10F of the Income-tax Act.
In order to carry out the above amendments, necessary changes in the application software will be made by the IT division.
Silence of Circular
Threshold limit of Rs. 5,000 under section 194A: The circular requires deduction of TDS on interest credited in the taxable part of EPF contribution under section 194A which provides for a threshold limit of Rs. 5,000. In other words, tax is required to be deducted on interest paid or credited if it exceeds Rs. 5,000 in a financial year. If interest income does not exceed Rs 5,000 in a financial year, no tax is required to be deducted. This aspect is silent in the EPFO’s circular. However, FAQ No. 8 clarifies that no TDS shall be made if the interest amount is upto Rs. 5,000 in the case of a resident.
Deduction of TDS at a lower rate as per certificate u/s 197: The EPFO Circular does not mention anything about the deduction of TDS at a lower rate if any member furnishes a lower TDS certificate under section 197 of the Act. If a lower TDS certificate is furnished by the member then EPFO is bound to deduct TDS at the lower rate as specified in the certificates so issued by the income-tax department u/s 197. The procedure for furnishing lower TDS certificate u/s 197 is not mentioned in the circular.
Applicability of TDS rates in the case of a non-filer u/s 206AB: The circular is silent on the applicability of TDS rates in the case of a non-filer. The circular though mentions deduction of TDS at a higher rate of 20% under section 206AA if the PF account is not linked with a valid PAN, but does not mention the applicability of a higher TDS rate in the case of a non-filer as per the provisions of section 206AB of the Income-tax Act.
If a member has validly linked his PAN with the PF account but still tax is required to be deducted @ 20% if he is a non-filer of income tax return by virtue of applicability of section 206AB.
Illustration
The EPFO circular contains 3 illustrations to clarify the provisions of the circular with numeric examples. Out of these 3 illustrations, the first illustration is normally related to the members in general and hence is reproduced below. The other two illustrations can be read in the circular after downloading the same from the link given at the end of this article.
Illustration 1: Normal scenario
A is a salaried employee who makes monthly contribution (employee share) of Rs 30,000 to EPF. The closing balance at his account (employee share) as on 31.03.2021 is Rs.50,00,000/-. The calculation of taxable & nontaxable portion of contributions and interest earned on his EPF contribution (employee share)under both the accounts would be as under:
Opening Balance as on 01.04.2021 : Rs.50,00,000/-
(Amount in Rupees)
Thus, amount available under Taxable & Non-Taxable account at the end of the year would be as under:
(Amount in Rupees)
1. Tax is to be deducted at the time of credit of such amount to the account of the payee or at the time of payment, whichever is earlier.
2. Tax is to be deducted at the rate of 10%. If the recipient of income doesn’t furnish his PAN to deductor, then TDS is to be deducted @ 20%
FAQs in EPFO Circular
The circular also carries 32 FAQs for a better understanding of the provisions related to taxability of interest on taxable EPF contribution and TDS thereon.
These 32 Frequently Asked Questions (FAQs) are reproduced below.
Q 1. Under which circumstances TDS will be applicable in accordance with the Ministry of Finance Notification G.S.R. 604(E) dated 31.08.2021?
Ans. TDS will be applicable in case of PF Final Settlement, transfer claims, on transfer from Exempted establishments to EPFO and vice versa, on transfer from one Trust on another, past accumulations transfer, at the time of annual accounts processing, on back period accounting after accounts for year 2021-22 are processed in accordance with the Ministry of Finance Notification G.S.R. 604(E) dated 31.08.2021
Q 2. What is the effective date of deduction of TDS in accordance with the Ministry of Finance Notification G.S.R. 604(E) dated 31.08.2021?
Ans. it will be effective from 1st day of April, 2022.
Q 3. Is there any minimum amount upto which tax is not deducted?
Ans. The threshold limit for contributions for previous year 2021-22 and subsequent previous year is 2,50,000/- for EPF members.
Q 4. Whether the TDS will be applicable in death cases.
Ans. Yes, TDS will be applicable in death cases as in the case of a live member.
Q 5. Whether TDS will be applicable to Exempted Establishments and Exempted Trusts.
Ans. Yes, TDS will be applicable to Exempted Establishments and Exempted Trusts.
Q 6. Whether TDS will be applicable in case of International Workers.
Ans. Yes, TDS will be applicable in case of International Workers as in the case of Indian workers.
Q 7. At what rate TDS will be deducted if PF account is linked with a valid PAN for resident member?
Ans. If PF account is linked with a valid PAN, rate of TDS shall be 10 percent. (Ref. section 194 A)
Q 8. Whether TDS will be deducted if TDS amount is up to Rs 5000/- if member being resident.
Ans. No, TDS will not be deducted if TDS amount is up to Rs 5000/- if member is a resident. However, the member’s individual tax Liability towards his total tax shall remain.
Q 9. Whether TDS will be deducted if TDS amount is upto Rs 5000/- if member being nonresident.
Ans. TDS will be deducted at the applicable rates.
Q 10. Is it mandatory for EPF member to disclose his PAN details with EPFO / link PAN with UAN ?
Ans. As per section 206AA of IT Act, every taxpayer who receives taxable income needs to furnish their PAN to the payer (EPFO) of such income.
Q 11.At what rate TDS will be deducted in case of resident member if PAN is not linked/ invalid PAN?
Ans. If the PF Account is not linked with a valid PAN, tax shall be deducted at the higher of the following rates
(i) at the rate specified in the relevant provision of 206AA of the IT Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent:
(Ref. section 194 A read with section 206 AA of Income Tax Act)
Q 12. At what rate TDS will be deducted if PF account is linked with a valid PAN for nonresident member ?
Ans. If PF account is linked with a valid PAN, rate of TDS shall be 30 percent or tax rate as specified in the DTAA (Double Taxation Avoidance Agreement) whichever is beneficial to PF member.
(Ref. section 195 of IT Act read with section 90 of IT Act)
Q 13. At what rate TDS will be deducted in case of nonresident member if PAN is not linked/ invalid PAN?
Ans. If PF account is not linked with a valid PAN, rate of TDS shall be 30 percent or tax rate as specified in the DTAA (Double Taxation Avoidance Agreement) whichever is beneficial to PF member.
(Ref. section 195 of IT Act read with section 90 of IT Act)
Q 14. Whether surcharge and cess will also be applicable in case of TDS deduction in case of member being non-resident?
Ans. Yes, cess @ 4 % of TDS.
Rate of Surcharge is as under:
For interest upto Rs. 50 lacs- Nil
For interest above Rs. 50 lacs and upto 1 crore – 10 % For interest above Rs. 1 crore and upto 2 crore – 15% For interest above Rs. 2 crore and upto 5 crore – 25% For interest above Rs. 5 crore and upto 10 crore – 37% For interest exceeding Rs. 10 crore – 37%
(For FY 2021-22 / AY 2022-23)
Q 15. Whether surcharge and cess will also be applicable in case of TDS under section 194 A ?
Ans. No. (For FY 2021-22 / AY 2022-23)
Q 16. In case of death of a member, whose (EPF member or nominee) PAN will be considered for deduction of TDS?
Ans. Deduction of tax will be same as in case of a live EPF Member.
Q 17. Is there any declaration/form to be submitted by EPF member for claiming benefits of tax rates as per DTAA
Ans. Yes, as per section 90 of IT Act member has to submit form 10 F and form 10 FB of Income Tax.
[Ref. Sub-rule (1) of rule 21 AB and rule 21 AB (4)]
Q 18. By which date TDS deducted is to be deposited?
Ans. For the month of March------- by 30th April of next financial year.
For other months-------- by 7th of next month.
Q 19. How to deposit TDS?
Ans. Tax Deducted at Source has to be deposited using Challan ITNS-281.
Q 20. What is the rate of interest for not deduction of TDS?
Ans. As per Section 201 of IT Act, Interest will be levied @ 1 % for every month or part of a month on the amount of such tax from the date such tax was deductible.
Q 21. What is the rate of interest for not depositing of TDS deducted?
Ans. Interest @ 1.5 % for every month or a part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid to the credit of the Government.
Q 22. What is date for filing fee of TDS statement / return?
Ans. Due date for furnishing the TDS return in form 26Q for TDS u/s 194A and in 27Q if TDS is deducted u/s 195.
Q.23. what is penalty for not filing of TDS return?
Rs.200 for every day during which the failure continues. The amount of late fees however shall not exceed the amount of TDS.
(ref section 200(3) read with section 234 E)
Q 24. Is there any return to be filed by tax deductor with Income Tax department?
Ans. Yes,
(i) Form 26Q - Statement of deduction of tax under section 194.
(ii) Form 27Q - Statement of deduction of tax under section 195 in respect of the deductee (PF member) who is a non-resident (not being a company) or a foreign company or resident but not ordinarily resident.
Q 25. What are due dates for filing form 26 Q, 27 Q of Income Tax.
Ans. Due date for filing of TDS return (Both for Government and other Deductor) is as under:
(i) For 1st quarter i.e from April to June----------- 31st July of the financial year
(ii) For 2nd quarter i.e from July to September ------- 31st October of the financial year
(iii) For 3rd quarter i.e from October to December--------- 31st January of the financial
year
(iv)For 4th quarter i.e from January to March------- 31st May of the financial year immediately following the financial year in which deduction is made
Q 26..In case of Inter Office Transfer from One Regional Office to another, how TDS will be calculated?
Ans. In case of Inter Office Transfer from One Regional Office to another, details of month wise contributions during the financial year 2021-22 have to be shared through revised Annexure-K. The detail of total Taxable contribution along with its interest and TDS deducted (if any) is also to be shared through Annexure –K. Further, Opening Balance and Closing Balance along with withdrawals (separately for Taxable and Non- Taxable part will also have to be shared).
Q 27. In case of Exempted Trust to EPFO, how TDS will be calculated?
Ans. In case of Exempted Trust to EPFO, Exempted Trusts have to intimate to EPFO the month wise amount of Employee share of contribution of the member and TDS (if any) deducted and details of month wise contribution for the previous year 2021-22 and all subsequent previous years have to be shared through Annexure-K or other mode. The detail of total taxable contribution along with its interest and TDS deducted (if any) is also to be shared through Annexure –K. Further, Opening Balance and Closing Balance along with withdrawals (separately for Taxable and Non-Taxable part will also have to be shared).
On the basis of information provided by the Exempted Trust, EPFO will arrive at the total employee share during the previous year 2021-22 and subsequent previous year and interest thereof against the member/UAN and TDS amount after subtracting of TDS already deducted/ deposited (if any) against such member, EPFO while processing annual accounts/ claim settlement/ transfer of PF account of such members shall deposit the balance amount of TDS at the applicable rate.
Q 28. In case of Transfer from EPFO to Exempted Trust, how TDS will be calculated?
Ans. In case of Transfer from EPFO to Exempted Trust, EPFO has to intimate to an Exempted Trust about the month wise amount of Employee share of contribution of the member and TDS (if any) deducted. Details of month wise contribution for the previous year 2021-22 and all subsequent previous years have to be shared through Annexure-K or other mode. The detail of total Taxable contribution along with its interest and TDS deducted (if any) is also to be shared through Annexure –K. Further, Opening Balance and Closing Balance along with withdrawals (separately from Taxable and Non-Taxable part) will also be shared. On the basis of information provided by the EPFO, the Trust will arrive at the total employee share and interest thereof against the member/UAN and TDS amount after subtracting TDS already deducted/ deposited against such member. Exempted Trusts while processing the annual accounts/ settlement/ transfer of PF account of such members will have to deposit the balance TDS on interest in taxable account.
Q 29. What are the details to be shared in Annexure-K while transferring the fund from previous account to current account?
Ans. The month wise amount of Employee share of contribution of the member and TDS (if any) deducted and details of month wise contribution for the previous year 2021-22 and all subsequent previous years have to be shared through Annexure-K or other mode. The detail of total taxable contribution along with its interest and TDS deducted (if any) is also to be shared through Annexure –K. Further, Opening Balance and Closing Balance along with withdrawals (separately for Taxable and Non-Taxable part will also have to be shared).
Q 30. Whether taxable contribution part will be subject to a separate accounting of interest?
Ans. Yes, taxable contribution part will be subject to a separate accounting of interest and maintenance as the closing balance of this part will earn interest next year and will be subject to TDS.
Q 31. Whether taxable and non-taxable both parts will be used for withdrawal?
Ans. Yes, Withdrawal will be from taxable account thereafter from nontaxable account.
Q.32. what is the timeline for submission of form -16 A.
Ans. Due Dates to issue TDS certificates (Form 16)
Note:
· Form 16A is issued within 15 days from the due date of furnishing the TDS / TCS return.
· Form 16A is for TDS deducted on income other than salary
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