asane

EPF Interest Delays: How it affects tax compounding and filing

Online Niel November 10, 2024

“I asked my company and they informed me that the account was transferred successfully. I ran Helter Skelter for a month trying to figure out if my job change affected my interest credit or if there was another reason. As I didn’t get a response from EPFO support, I took to their X (formerly Twitter) account to complain, only to find out there are others like me,” he said.

Jain is right. Delay in payment of EPF interest is a common concern for several subscribers. This problem is not specific to any financial year and in fact it repeats itself year after year. Moreover, switching companies does not affect interest payment as EPFO systems calculate the interest till the date of settlement of the claim, said Vishwanath BG, associate director, Mercer Wealth India.

A quick look at EPFO’s X account shows the extent of the problem of late interest credit. Subscribers’ concern is that they may lose the benefit of late interest compounding.

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

EPF subscribers believe that the delay in crediting interest results in a similar loss to them.

Does the delay affect the combination?

EPFO claims that there is no loss of interest earned to the subscribers. According to the FAQ section of the EPFO website, updating the passbooks of interested members is an entry process.

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

Vishwanath pointed out that when EPFO declares the interest rate, it goes to the labor ministry and the finance ministry for approval. “The entire process may take some time to delay the crediting of interest to members’ accounts.”

But what happens if 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 accrue as per the declared interest rate till the date of withdrawal.

The only scenario where some members may incur interest losses is if they request a withdrawal or transfer of funds before the interest rate for that year is declared. “EPFO considers the interest rate declared for the previous year to process the application. If the interest rate for the current year is higher than the previous year, to that extent, the member will be losing interest,” he said.

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

However, this is not related to late interest credit. “EPFO has amended its guidelines to include this provision to clarify what rate will apply when a member retires in the middle of a financial year,” Vishwanath said.

Although delay in interest payment may not affect interest compounding, it complicates filing of Income Tax Return (ITR) for some subscribers.

Tax filing implications

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

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

“This will lead to under-reporting and the taxpayer has to pay interest on the tax owed. In some cases, the Assessing Officer may also levy a penalty for underreporting income under section 270A of the IT Act,” said Deepak Kakkar, Chartered Accountant and Senior Manager, Jaikumar Tejwani & Co. LLP in Delhi.

“In most cases, the AO may not levy the penalty as this is not a case of willful reporting, but they are entitled and the penalty is 200% of the interest amount,” he added.

Another 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 from FY23 reflected in FY24 Form 26AS.

“EPFO reports the previous year’s taxable interest in the current year’s TDS. CBDT (Central Board of Direct Taxes) has notified Form 71 to allow TDS credit in respect of income disclosed in ITR filed in previous years to address this issue. We have sent the form but further compliance is unnecessary,” he said.

Even in case of late interest, taxpayers are advised to calculate interest on excess contribution for the same year and report it correctly in ITR.