Tax on EPF, NPS, Superannuation fund: Here's all you need to know about it

Effective from FY 2020-21, if employer's contribution to retirement funds such as Employees Provident Fund (EPF), National Pension System (NPS), or any other superannuation fund that exceeds Rs 7.5 lakh in a financial year, then the excess contribution will be taxed in the hands of the employee. This will have a negative impact on those who earn high basic salaries.

Additional payments made by the employer will be taxed as perquisites in the hands of employees. Further, any interest, dividends etc. earned from the excess contribution will be taxed as well. Previously, there was no such monetary limit on the employer's contribution. Any contribution made by employer to above-mentioned funds was tax-exempt for employees.

Thus, for current financial year, if the total aggregate made in the EPF, NPS and superannuation fund exceeds Rs 7.5 lakh, then it is important to know how taxable portion will be calculated.


To ascertain how interest, dividend etc. will be calculated, the Central Board of Direct Taxes (CBDT) has issued a notification on March 5, 2021, explaining the method for calculating it. The process was described under Rule 3B of the Income Tax Rules, 1962.

This is the following formula prescribed by the CBDT: TP = (PC/2)*R + (PC1+TP1)*R

Abhishek Soni, CEO, Tax2Win.in - an ITR filing website explains the formula and how it will be used to calculate taxable contribution and interest/dividend etc. earned on excess contribution. The above-mentioned formula must be seen in two parts to calculate the interest earned on excess contribution in the current financial years and interest earned on excess contribution in the previous financial years.

On the left hand-side 'TP' is the taxable perquisite. This amount which we have to calculate and will be added in gross total income on which tax will be payable as per the income tax slab applicable to you.

On the right-hand side, the formula must be divided into two parts. The first part is (PC/2)*R. Using the first we calculate interest earned on excess contribution in current financial year which will be taxable.

Here PC is the excess contribution made to EPF, NPS and or superannuation fund.

PC = Total amount contributed by an employer in EPF, NPS and superannuation fund minus Rs 7.5 lakh.

R is the rate of interest. This the interest earned on excess contribution from EPF, NPS and superannuation fund. This will be calculated as Interest earned from contribution and average of opening and closing balances of the funds i.e., EPF, NPS and superannuation fund.

R = Interest earned/Average of opening and closing balances of fund.

Average of opening and closing balances = (opening + closing balances)/ 2.
The second part is (PC1+TP1)*R. This part calculates the interest earned on the excess contribution made in the previous years.

PC1 is the excess contribution made in the previous financial years.
TP1 is the taxable perquisite (interest on excess contribution of last year) from the previous financial years on which tax has been paid.

R is the rate of the interest earned. This will be the same which is calculated in the first part of the formula.

It is essential to report the excess employer contribution and the accretion thereon appropriately in their ITR. The employee should always select the correct ITR form based on his or her sources/amount of income, or else the Income Tax Department may issue a notice.