EPFO Interest Taxation: Year of Credit or Accrual?
Many taxpayers are confused about EPFO interest taxation, especially when the interest is credited late — often years after it accrues. The key dilemma: Which year should you pay tax in — when the interest is earned (accrual) or when it hits your EPF passbook (credit)?
Let’s decode the issue using official guidance, expert opinions, and practical tax advice.
What Triggered the Confusion?
Post Budget 2021, the Finance Act inserted proviso to Section 10(11) of the Income-tax Act, 1961, which made EPF interest taxable if your contribution exceeds ₹2.5 lakh in a financial year (₹5 lakh if there’s no employer contribution, such as GPF). This led to the introduction of Rule 9D on 31.08.2021 via Notification No. G.S.R. 604(E).
Per Rule 9D:
- Separate PF accounts are maintained for taxable and non-taxable interest.
- Only the taxable portion needs to be reported under “Income from Other Sources.”
However, EPFO often credits interest with delays — for example, FY 2022–23 interest might only reflect in the passbook by July 2024. This mismatch causes issues while filing returns — AIS and Form 26AS don’t always align with the EPF passbook.
CBDT’s Position on Interest Taxation Timing
CBDT hasn’t issued a direct circular on this specific issue for EPF interest. However, general principles from Circular No. 14/2001 dated 09.11.2001 (related to bank FDs and interest on NSCs) clarify that interest income is taxable either on accrual or receipt basis, depending on the accounting method followed by the assessee.
For salaried individuals (who follow cash basis accounting by default), interest becomes taxable when it is credited and available to them — even if it relates to earlier years.
Expert Opinion: Year of Credit is Safer
Chartered Accountant Ashish Karundia, a known voice on tax matters, suggests taxing the interest in the year of credit, not accrual. Why?
“You cannot pay tax on income that is not reflected in Form 26AS/AIS or actually credited in the passbook. The prudent approach is to offer it to tax in the year it becomes traceable and usable.”
This view is consistent with how EPFO credits interest — the credit date becomes the key trigger, not the financial year it pertains to.
Practical Scenarios: What You Should Do
| Scenario | Interest Accrued | Interest Credited | When to Report? |
|---|---|---|---|
| FY 2022–23 | ₹15,000 | July 2024 | AY 2025–26 |
| FY 2023–24 | ₹18,000 | July 2025 | AY 2026–27 |
Tip: Always check your EPF passbook in July/August and match it with AIS/Form 26AS before filing your ITR.
Key Takeaways for EPFO Interest Taxation
- If EPF interest is credited late, tax it in the year it appears in your passbook and AIS.
- Rule 9D applies only if your contribution exceeds ₹2.5L/₹5L, otherwise interest is exempt under Section 10(11).
- Salaried taxpayers using cash basis should report interest when received, not when accrued.
Expert Tip: Watch Your Contribution Limits
To avoid the entire confusion, try to keep annual EPF contributions below ₹2.5 lakh, unless you’re eligible for the ₹5 lakh threshold (no employer contribution). This ensures all EPF interest remains tax-free — no extra reporting, no 26AS mismatch.
Final Word
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FAQ on EPFO Interest Taxation
Q1. Is EPF interest always taxable?
No. Only if your contribution exceeds ₹2.5 lakh/year (₹5 lakh if no employer contribution) — interest on excess is taxable.
Q2. What if EPF interest is for FY 2022–23 but credited in 2024?
Then it should be taxed in AY 2025–26, the year of credit.
Q3. What if it’s not reflected in AIS but is in the passbook?
Prefer taxing only when reflected in both. You can delay reporting until it appears in AIS to avoid mismatch issues.
Summary
Confused about when to pay tax on delayed EPFO interest? Tax it in the year of credit, not accrual — especially if you follow cash accounting. CBDT rules and expert views support this approach. Avoid mismatch with AIS and EPF passbook by syncing your ITR timeline with actual credit dates.