How is the tax on EPF interest calculated?

I have contributed continuously to the Employees Provident Fund (EPF) for over 10 years until 31 December 2015, when I was working with a company(say, ABC) . After quitting the firm, I did not withdraw my EPF and worked independently and with small companies that were not obligated to contribute to EPF for two years (2016 and 2017). I joined employer (say, XYZ) on 1 January 2018 and resumed contributing to EPF until 31 December 2019. I transferred my EPF from employer ABC to employer XYZ only in October 2022 and withdrew my entire EPF balance on 30 April without any tax deducted at source (TDS) by EPFO.

Is EPF interest that accrued during the periods when I was not contributing to EPF taxable? Specifically, is the interest earned between 1 January 2016 and 31 December 2017 and between 1 January 2020 and 30 April taxable in the financial years in which the interest was earned?

—Name withheld on request

The accumulated provident fund (PF) balance to the credit of the employee as on the date of cessation of employment, is exempt from tax, if he/she has rendered continuous service for five years or more. Where an employee changes his job and transfers his PF balance from previous employer to new employer, the period of employment with the previous employer(s) is also included in computing the period of continuous service.

As you transferred the PF balance with your previous employer (ABC) to your account with subsequent employer (XYZ) and thereafter withdrew the accumulated PF balance, the period of five years would also include the period of service with ABC. Accordingly, the accumulated balance to your credit (till cessation of last contribution) should be exempt from tax at the time of withdrawal, to the extent specified.

As held in few judicial precedents, interest accrued on the accumulated balance, post the period of cessation of employment (i.e. the period when no contribution is made to the EPF) continues to be taxable. Such interest shall be taxable in the respective financial year in which such interest is accrued/ credited at the tax rates applicable to you for the respective financial year. Accordingly, interest for the period from 1 January 2016 to 31 December 2017 and 1 January 2020 to 30 April 2023 (when no contributions were made to the PF account) should be taxable as income from other sources.

Since you transferred the PF balance with your previous employer (ABC) to your account with subsequent employer (XYZ) and thereafter withdrew the accumulated PF balance, the period of five years would also include the period of service with ABC.

Accordingly, the accumulations to your credit during your employment with XYZ from 1 January 2018 to 31 December 2019 (including interest accrued) would also not be taxable. Hence, none of the components shall be taxable in your hands for the period 1 January 2018 to 31 December 2019.

Interest accrued on the accumulated balance, post the period of cessation of employment (i.e. the period when no contribution is made to the PF) is taxable.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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