The Budget proposal to tax interest earned on annual provident fund contribution beyond Rs 2.5 lakh is going to severely impact the employee provident fund (EPF) returns of high-income earners in the next financial year. If your EPF and voluntary provident fund (VPF) annual contributions go beyond Rs 2.5 lakh then the tax on interest will be same as the income tax rate (including surcharge, if any) applicable to the individual.
Net interest earnings from EPF will fall further if Public Provident Fund (PPF) contribution is also included in the Rs 2.5 lakh amount. Worth mentioning here is that the Budget papers mention interest under Section 10(11), which is the section that covers PPF interest. If PPF contribution is included in the Rs 2.5 lakh limit this will further reduce the weighted average returns from the provident fund investments. There is no clarity yet on whether the limit includes PPF contributions or not.
Here is how the new tax will impact provident fund earnings for individuals in each tax slab:
| Individual's annual contribution to EPF |
EPF returns (%) |
Returns if PPF contribution added |
| Up to Rs 2.5 lakh |
8.5 |
7.1 |
| Rs 3 lakh |
8.0 |
7.0 |
| Rs 6 lakh |
6.9 |
6.5 |
| Rs 12 lakh |
6.4 |
6.2 |
| Rs 24 lakh |
6.1 |
6.0 |
| Rs 36 lakh |
5.7 |
5.7 |
| Rs 48 lakh |
5.7 |
5.7 |
| Rs 60 lakh |
5.5 |
5.5 |
| Rs 1.2 crore |
5.2 |
5.2 |
| Rs 2.5 crore |
4.9 |
4.9 |
Source: Economic Times
The first Rs 2.5 lakh contribution will earn 8.5% tax-free interest for next year as well assuming EPF interest rates do not change for the next year. If your EPF contributions increase to Rs 3 lakh then post-tax interest yield from EPF will be 8%. According to a report in the Economic Times, EPF returns will fall to 5.7% if annual contributions to EPF and VPF together remains between Rs 36-48 lakh, then interest yield will fall to 5.7%. Here it has been assumed that the taxable income of the individual is close to one crore but not exceeding it. Therefore, the tax on interest will be 30% plus 10% surcharge. For contributions of Rs 60 lakh, it has been assumed that income of the individual is between Rs 1 crore and Rs 2 crore, which attracts 30% tax along with 15% surcharge. High contributions of Rs 1.2 crore annually, assumed to be in the Rs 2-5 crore income slab (30% tax plus 25% surcharge), and Rs 2.5 crore annually, assumed to be earning above Rs 5 crore (30% tax plus 37% surcharge).
The above calculation shows EPF returns will fall sharply to 6.12% for those investing Rs 24 lakh in VPF and EPF. If PPF contribution in also included, the net returns will drop to 6% assuming annual taxable income of the individual is close to Rs 50 lakh but not more than Rs 50 lakh.
Tax experts say falling yields from EPF will push investors towards other instruments like National Pension Scheme (NPS) or equity mutual funds. In NPS taxpayers can claim an additional Rs 50,000 deduction under Section 80CCD.
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