EPF interest delays: How it impacts compounding and tax filing

“I enquired with my company and they informed me that the account was transferred successfully. I ran helter skelter for one month trying to figure out whether my job change had impacted interest credit or if there was another reason. On not getting a response from EPFO support, I went to their X (erstwhile Twitter) account to complain, only to find out there were several others like me," he said.

Jain is right. Delay in EPF interest payment is a common concern for several subscribers. This issue is not specific to any one financial year and, in fact, recurs year after year. Moreover, changing companies does not impact the interest payment since EPFO systems calculate the interest till date of claim settlement, said Vishwanath B G, associate director, Mercer Wealth India.

Also read | No interest on National Savings Scheme from Oct 1: What it means for you

A quick glance at EPFO’s X account shows the scale of the problem of delay in interest credit. The concern for subscribers is that they may be losing the benefit of compounding on the delayed interest.

To explain with an example, if the interest rate on a ₹1,000 deposit is 8%, ₹80 is credited to the account at the end of year, which makes the new principal ₹1080 on which interest is earned over the next year. The interest in the second year would be ₹86.4. However, if the ₹80 interest payment in the first year is, say, delayed by two months, the depositor will earn 8% on the ₹1080 principal for 10 months, which would be ₹71.9 instead of ₹86.4.

EPF subscribers believe delay in credit of interest is resulting in a similar loss for them.

Does delay hurt compounding?

EPFO asserts that there is no loss on interest earned for subscribers. As per the FAQ section on the EPFO website, the updating of member passbooks with interest is an entry process.

“The date on which the interest is entered in the passbook of the member has no actual financial bearing as the interest earned for the year on his monthly running balances is always added to the closing balance of that year and it becomes the opening balance for the next year. Hence, the member does not suffer any financial loss in case there is any delay in updating interest in his passbook," said the EPFO website.

Vishwanath pointed out that when the EPFO declares interest rate, it goes for concurrence to the labour ministry and the finance ministry. “The entire process can take some time delaying the crediting of interest in members’ accounts."

But, what happens in a case where the subscriber withdraws the deposit before the interest of the previous financial years is credited? Vishwanath says there is no loss even in this case as the interest would accumulate as per the declared interest rate till the date of withdrawal.

Also read | You can invest in debt using online bond platforms. Here’s how

The only scenario in which some members may incur interest loss is if they apply for withdrawal or transfer of funds before the interest rate for that year is declared. “EPFO considers the previous year's declared rate of interest to process the claim. If the present year rate of interest is higher than the previous year, to that extent, member will be in loss of interest," he said.

To explain with an example, EPFO declared 8.25% interest rate in Feb 2024 for FY24. Say, Mr A is a subscriber who applies for withdrawal in December 2024. If EPFO increases the current financial year’s interest rate, Mr A’s claim will still be settled as per the previous years’ rate of 8.25% even though he has contributed for eight months this year. As a result, he will lose on the differential between previous year and current years’ rate.

However, this is not related to delay in interest credit. “The EPFO amended its guidelines to include this provision to clarify which rate would apply when a member withdraws in the middle of a financial year," said Vishwanath.

While the delay of interest payment may not impact compounding on interest, it does complicate Income Tax Return (ITR) filing for some subscribers.

Also read | Parametric insurance: The quick and transparent alternative to traditional cover

Tax filing implications

Starting FY 2022, interest earned on an employee’s EPF contributions above ₹2.5 lakh is taxed as per slab rates. The EPF office also deducts 10% TDS before crediting the interest if it is above ₹5,000. Next, the subscriber has to declare interest earned on such excess contributions in their ITR under ‘income from other sources’ and pay due tax.

Now, delayed interest credit can pose challenges in ITR filing for taxpayers with contributions above ₹2.5 lakh. This is because interest not credited to the account will not reflect in Form 26AS and consequently Annual Information Statement (AIS). As a result, there will be a mismatch between declared income in ITR and AIS. However, a bigger issue is that taxpayers may not declare the interest income at all as they have not received the income to declare it.

Also read | Indian art prices are at an all-time high. Is there stagnation or growth ahead?

“This will result in underreporting and the taxpayer has to pay interest on due tax. In some cases, the assessing officer can also levy a penalty for underreporting of income under section 270A of the IT Act," said Deepak Kakkar, a Delhi-based chartered accountant and senior manager, Jaikumar Tejwani & Co. LLP.

“In most cases the AO may not levy the penalty as this is not a case of intentional under reporting, but they have the right to and the penalty is 200% of the interest amount," he added.

A different set of problems arise when the interest is finally credited. Kakkar noted that many of his clients in the current assessment year saw EPF interest income of FY23 reflecting in FY24 form 26AS.

“EPFO is reporting previous year's taxable interest in current year's TDS. CBDT (Central Board of Direct Taxes) had notified Form 71 to allow TDS credit in respect of income disclosed in ITR filed in earlier years to resolve this issue. We have submitted the form but it is unnecessary increased compliance," he said.

Even in the case of delayed interest, taxpayer’s are advised to calculate interest on excess contribution for the same year and report it correctly in their ITR.