The Employees Provident Fund Organisation (EPFO) has been in existence since 1952 and currently manages approximately 300 million accounts of its members, according to its annual report for 2022-2023. The employee provident fund (EPF) is a mandatory scheme that employers must offer if they employ at least 20 employees. It aims to provide financial security to employees earning up to Rs 15,000 per month through accumulating a provident fund. However, in practice, many employers extend this scheme to all employees earning significantly more than the stipulated maximum salary. Another factor contributing to the EPFO's popularity is the higher interest rates and the exempt-exempt-exempt (EEE) tax benefits it offers. However, it is important to note that these tax exemptions do not apply if the interest is earned in a certain way. To fully understand the benefits of the EPF account, it is essential to first understand what an EPF account is, its Universal Account Number (UAN), and why it is important to keep the EPF account balance updated.
EPF Interest: When Does It Become Taxable?
EPF is known as an exempt-exempt-exempt investment, a tax-friendly and long-term financial planning scheme to plan for retirement
EPF Account And UAN
Notably, upon joining an organisation covered under the EPFO rules, an EPF account is opened for each employee. When one switches the job and joins another organisation, the same process is repeated. The new employer opens a new EPF account for the employee. In this process, the Universal Account Number (UAN) (a 12-digit unique number) remains the same, and only the EPF account is changed.
In this process, one needs to be careful about timely transferring the funds lying in the EPF account with the previous organisation.
Why Should You Not Ignore Transferring The EPF Balance To The New Account?
While a new job can make a person busy, it is important to complete all the formalities to transfer the EPF account and keep the balance updated. Notably, when one leaves the EPF balance in the previous EPF account, it keeps earning interest income, but not forever.
According to the EPFO rules, the account remains active for three years and then becomes inoperative if no contribution is credited to the account. After that, it stops earning interest income.
Does The Interest Earned In An Inoperative EPF Account Get Taxed?
Says CA Gaurav Makhijani, Rödl & Partner: “In case a person changes his/ her job and does not shift or transfer their EPF account, the EPF account becomes inactive after a certain period. In such a scenario, the interest credited to the account no longer qualifies for exemption. Thus, interest earned on such an inactive account becomes taxable for such individual. The tax rate will be as per the slab rate of the recipient.”
This is the case where interest income becomes taxable but in certain cases the deposit also remains taxable, highlight Makhijani.
He says, “Generally, interest from EPF is tax-exempt subject to the condition that there is continuous employment for 5 years (as per the applicable regulations). From April 1, 2021, interest accrued on the portion of employee contributions exceeding Rs 2.5 lakh in a financial year is not exempt from tax. In cases where there is no contribution from the employer (such as in the Voluntary Provident Fund or where the employer is not subject to EPF provisions), this threshold is extended to Rs 5 lakh.”
So, if you use EPF to save for retirement, remember to keep the EPF account details updated and its funds transferred to the latest EPF account so that you do not lose interest income and tax.