Nifty Share Price News, Mumbai, 16 March 2026: The Employees’ Provident Fund (EPF) is the most popular and secure retirement plan for employees in India’s private and government sectors. Run by the EPFO (Employees’ Provident Fund Organisation), both employees and employers contribute 12%. The main attraction is the interest. Earlier, the entire interest on EPF was tax-free, but the rules changed from the financial year 2021-22.
The limit for tax-free interest on EPF contributions has now been fixed. In this article, we are giving detailed information about this limit, its rules, calculation, TDS, examples and practical advice. (According to the latest rules up to March 2026).
What is EPF and how do you earn interest on it?
EPF is a mandatory savings scheme. Employees contribute 12% of their basic salary plus dearness allowance (Basic + DA). The employer also contributes the same amount.
- EPFO announces the interest rate every year (currently 8.25% per annum for FY 2025-26).
- Interest is calculated on the monthly balance using the compound method and is credited to the account at the end of the year.
- Earlier (before 1 April 2021) all interest was tax-free (under Section 10(11)).
But now it is tax-free only up to the limit of interest on the employee’s contribution.
- What is the tax-free limit on interest for EPF contributions?
- Main rules (effective from Finance Act 2021):
Private/non-government employee (employer contributes to EPF):
Employee’s annual contribution up to ₹2.5 lakh – entire interest is tax-free.
For government employees or where the employer does not contribute (e.g., Statutory Provident Fund):
Up to ₹5 lakh – all interest is tax-free
If an employee’s total contribution (EPF + VPF) in a financial year exceeds the limit, the interest on the excess contribution is taxable. This interest is added to the employee’s income as ‘Income from Other Sources’ and tax must be paid according to the slab rate.
Important:
- This limit only applies to the employee’s own contribution.
- Interest on the employer’s contribution has always been tax-free (but the total employer contribution is tax-free up to a combined limit of ₹7.5 lakh).
How does the process of tax implementation and calculation work?
EPFO now calculates two types of interest:
- Tax-free interest – on contributions up to ₹2.5 lakh/₹5 lakh.
- Compounded interest – on additional contribution.
Calculation formula (as per CBDT Rule 9D):
- First, the total interest is calculated.
- Later, portable interest = (extra contribution / total contribution) × total interest.
Example (private employee):
- Annual employee contribution: ₹3.5 lakh (exceeded the limit of ₹2.5 lakh).
- Total EPF balance: ₹2 million.
- Interest earned during the year: ₹1.6 lakh (at 8.25%).
- Extra contribution = ₹100,000.
- Accrued interest = (100,000 / 350,000) × 160,000 = ₹45,714 (approx).
- This ₹45,714 interest will have to be shown in the ITR as “Income from Other Sources”. 5% to 30% + cess will apply according to the tax slab.
How is TDS (Tax Deducted at Source) deducted?
- EPFO now deducts TDS on taxable interest.
- 10% TDS if you have a PAN
- If you don’t have a PAN, 20% TDS.
- You will get the TDS certificate Form 16A and it can be adjusted in the ITR.
- TDS is deducted after the interest is credited (usually in March).
The difference between 80C contributions and EPF tax exemption
- Under Section 80C, employee contributions get a tax deduction up to ₹1.5 lakh (EPF + VPF + PPF + ELSS etc.).
But the tax-free limit for interest is ₹2.5 lakh (for interest only). - So you can contribute up to ₹2.5 lakh – only ₹1.5 lakh will be deductible under 80C, but the entire interest will remain tax-free.
Voluntary Provident Fund (VPF) and extra contributions
VPF is a voluntary scheme of EPF. Contributions to VPF are also included in the employee’s contribution.
- If the limit of ₹2.5 lakh is crossed, the interest on VPF also becomes taxable.
- Tip: If you want to save more, turn to other schemes like PPF or NPS, where the interest is completely tax-free.
Latest update (2025-26 Budget and 2026)
- The EPF interest tax exemption limit hasn’t changed (still ₹2.5 lakh / ₹5 lakh).
- The combined limit of the employer’s contribution (EPF + NPS + Superannuation) has stayed at ₹7.5 lakh.
Interest rate fixed at 8.25% (announced by EPFO).
Practical advice and caution
- Check your EPFO passbook: Log in to the Unified Member Portal to see monthly contributions and interest.
- Avoid taxable interest: Keep contributions under ₹2.5 lakh or invest the extra amount in NPS Tier-1 (EEE status).
- ITR Filing: The interest will appear in the AIS (Annual Information Statement) as per Form 16A. Avoid incorrect reporting.
- Government employee: Enjoy a benefit of up to ₹5 lakh.
- Employees with high salaries: Consider NPS or tax-free bonds instead of VPF.
Conclusion
EPF is a great scheme, but if contributions exceed ₹2.5 lakh (private) or ₹5 lakh (government), the interest is no longer tax-free. With proper planning, you can keep all the interest tax-free and strengthen your retirement fund.
For more information, check out the EPFO website (www.epfindia.gov.in), the Income Tax India portal, or get in touch with a certified tax advisor. Rules can change, so make sure to check for updates every year.
Use EPF + NPS + PPF together for tax saving and get maximum benefit of tax-free interest!
(This information is based on available sources up to March 2026. For personal advice, consult a CA.)
