EPF & PPF: Why You Must Declare Tax-Exempt Interest

Tax professionals advise that even though interest earned on your Employees’ Provident Fund (EPF) and Public Provident Fund (PPF) is often tax-exempt, you should still declare it in your annual Income Tax Returns (ITR). While not reporting it won’t incur a penalty, failing to do so could lead to complications and scrutiny of your finances later on.

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The taxability of EPF and PPF interest is governed by different rules:

• Public Provident Fund (PPF): Interest on PPF is completely tax-free under Section 10(11) of the Income Tax Act, regardless of the account’s duration. This means deposits, interest, and withdrawals are all exempt. You should still report this accrued interest annually in Schedule EI of your ITR, which is designated for exempt income.
• Employees’ Provident Fund (EPF): EPF interest is only tax-free if you have been in continuous service for at least five years. If you withdraw the funds before this period, the entire amount—including your employer’s and your own contributions, as well as the interest—becomes fully taxable. Additionally, since the financial year 2021-22, interest earned on annual EPF contributions above ₹2.5 lakh (or ₹5 lakh for government employees) is also taxable.

Declaring this income, even if it’s exempt, helps establish a clear financial trail. This can be crucial if you are ever audited or if you use large funds from these accounts for high-value purchases or investments. By disclosing this information, you maintain transparency and strengthen your financial records.