EPF, PPF interest is tax free but not declaring it could cost you later

Even though interest earned on EPF and PPF accounts is tax-exempt, tax professionals advise reporting it in annual Income Tax Returns (ITR) to maintain financial transparency and avoid complications later.

Interest from the Employees’ Provident Fund (EPF) is only tax-free if the employee remains in continuous service for at least five years. If withdrawn earlier, the entire benefit is reversed—making the employer’s contribution, the employee’s contribution (if tax benefits under Section 80C were claimed), and the interest fully taxable.

For example, withdrawing ₹1.5 lakh from EPF, including ₹20,000 in interest, before completing five years could result in the entire amount being taxed. 

Each component of the fund is treated separately for taxation, with specific rules governing how much remains exempt and what becomes taxable.

While there is no penalty for not reporting this tax-free interest, tax professionals say disclosing it annually in the ITR is a sound practice. It helps establish a financial trail, particularly if large funds are later used for high-value purchases or investments.

In contrast, interest earned on the Public Provident Fund (PPF) remains completely tax-free under Section 10(11) of the Income Tax Act, regardless of the duration or account holder. Deposits, interest, and withdrawals are all exempt. Still, taxpayers are encouraged to report the interest accrued each year in Schedule EI of their ITR—the section designated for exempt income.

Online forums are rife with confusion, with users often unsure whether and where to declare this income. Tax professionals consistently recommend declaring accrued interest, even if it won’t be taxed, to maintain accuracy and clarity in financial records.

Ultimately, while skipping this disclosure might not attract penalties, failing to report exempt interest could raise questions in the future. Declaring it reinforces transparency and strengthens your position if your financial records are ever scrutinized.