Tax-free EPF interest after retirement is in Budget 2026 wish list of experts; here's why

There is a common misunderstanding that EPF income is fully tax-free. However, this is not always the case. There are at least two situations in which EPF members have to pay tax on the interest earned:

First, when the annual contribution exceeds ₹2.5 lakh, the interest credited to your account on contributions above this threshold is taxed.

Second, when interest on the accumulated balance is credited to your provident fund account after retirement.

While the first situation is widely known, many EPF members are not aware of the second.

Many members do not withdraw the full EPF balance soon after retirement. While you don't have to pay tax on the EPF balance after retirement, the interest credited on such balance is taxable.

As Budget 2026 approaches, tax experts at the Bombay Chambers of Commerce and Industry (BCCI) are expecting the Finance Ministry to remove the second rule, making interest credited to the EPF account after retirement tax-free.

In their pre-budget memorandum, the BCCI experts recommended the following:

"It is recommended that tax treatment of interest earned on PPF balance with Government Provident Fund and Recognized Provident Fund should be at par. Accordingly, interest earned by an assessee from recognized provident fund even after retirement or termination of employment should be exempt."

Current rule explained

Interest earned on the EPF balance after retirement becomes taxable. This is because the tax benefit on EPF interest is available only till you are employed.

As per EPFO rules, the accumulated balance of recognised provident fund on retirement is exempt from tax under section 10(12).

Further, you are allowed to keep the balance in the EPF account for up to three years after retirement. However, the interest earned on the EPF balance during this period is taxable as normal income.

However, in the case of the government provident fund, the interest credited on the balance post retirement is exempt under section 10(11).

"On retirement, the accumulated balance of recognised provident fund becomes due to employee is exempt u/s 10(12). Rules permits member to keep the accumulated balance for three years post-retirement. However, interest credited on balance of member after retirement is not exempt," BCCI said.

"In case of Government PF interest credited on balance post retirement is exempt u/s 10(11)," it added.