The Central Government (the Ministry of Labour and Employment) had issued a notification No. R-11018 / 1/ 2010.SS- II dated 17.03.2011 in March 2011, providing its approval for crediting of interest at the rate of 9.5 per cent for the year 2010-11 to the account of each Employees’ Provident Fund (“EPF”) member subject to certain conditions. However, the then prevailing notification No. S.O. 2091(E), dated 26.08.2010 issued by the Ministry of Finance [providing for income-tax exemption rate for such interest for the members of Recognised Provident Funds (“RPFs”)] had fixed the interest at the rate of 8.5 per cent with effect from 1 September, 2010, beyond which the excess interest credited to the members’ accounts would be liable to income tax and taxable under the head `Salaries’ In terms of Rule 6(b) of the Part A of Fourth Schedule to the Income-tax Act, 1961 read with Section 17(1)(vi) of the Income-tax Act, 1961. Consequentially, the differential interest of 1 per cent credited to the members’ accounts (for the period 1 September, 2010 to 31 March, 2011) was chargeable to income-tax in the hands of the RPFs’ member employees.
This resulted in a disparity between the interest earned on EPF balances and the income-tax exemption enjoyed by the RPFs members.
To remove this anomaly, the Central Government has now come up with a notification No S.0.1046(E), dated 13.05.2011 (superseding the earlier prevailing notification dated 26 August, 2010) whereby it fixes interest rate at the rate of 9.5 per cent with retrospective effect from 1 September, 2010 on the EPF balances of the employees which are members of the RPFs. Thus, the interest exceeding at the rate of 9.5 per cent shall be treated as taxable income.
In view of the clarity provided by this notification issued by the Ministry of Finance, the interest credited to the EPF accounts of the employees (which are members of the RPFs) at the rate of 9.5 per cent for year 2010-11 shall not be taxable.