1. The Government had capped the tax-free interest earned on provident fund contribution by employees to a maximum of Rs. 2.5 lakh in a year vide Budget 2021-22.

1.1 Section 10(11) and 10(12) of the Income Tax Act provides an exemption for the statutory provident fund and recognized provident fund respectively. Till 31st March 2021, the interest credited every year in the Employee provident fund account (EPF) was exempt from tax. The deposits in EPF were under the Exempt, Exempt, Exempt (EEE) tax category. Thus, an employee was not liable to pay tax at all three levels – investment, earning, and withdrawal.

1.2  A provision had been inserted to Sections 10(11) and 10(12) vide Finance Bill 2021. Accordingly, no exemption shall be available for the interest income accrued during the previous year in the recognized and statutory provident fund to the extent it relates to the contribution made by the employees over Rs. 2, 50,000 in the previous year on or after the 1st day of April 2021. The tax shall be computed in such manner as may be prescribed.

1.3 The threshold limit had been increased to ₹5 lakhs per annum in the General Provident Fund (GPF)

EPF or Employees Provident Fund

2. Key Points of the Amendment vide Finance Bill 2021

(a)  This interest taxability shall be applicable only for the contribution made on or after April 1, 2021.

(b) The employee’s principal contribution, employer’s contribution, entire interest earned on employers’ contribution, and interest earned by the employee till 31st March 2021 are not taxable

(c) The interest income earned on excess contribution will be taxable only in those cases where the employees’ annual PF contribution exceeds Rs. 2, 50,000, or Rs 5,00,000/- as the case may be.

(d) The contribution to PPF is already restricted to Rs. 1.5 lakhs p.a. currently, so this amendment will not have any impact on PPF contribution.

Refer articles Taxability of Interest on Excess PF Contribution-New Threshold Limit & Manner of Tax Computation dated 01.05.2021 and Taxability of Interest on Excess PF Contribution dated 11.02.2021for further details.

3. Rule for taxable Interest  on Excess PF Contribution The CBDT has inserted Rule 9D vide  Notification no. 95/2021 dated 31st August 2021  for calculation of interest on PF contribution

3.1  The newly inserted Rule 9D has specified that separate accounts within the PF Accounts shall be maintained clearing segregating the taxable and non-taxable contributions to PF along with interest thereon.

3.2  As per Rule 9D, for calculation of taxable interest, the following separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years.

4. Non-taxable Contribution Account  Non-taxable contribution account shall be the aggregate of the following –

(a) closing balance in the account as on 31st day of March 2021 that is opening balance as on 01 Apr 2021.

(b) Any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous years up to the threshold limit of non-taxable contribution

(c) Interest accrued on para 4 (a) and 4(b) above .

5. Taxable Contribution Account Taxable Contribution Amount shall be the aggregate of the following: –

(a) Contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is more than the threshold limit

(b) Interest accrued on contribution made more than the threshold limit.

6. The threshold limit shall mean –   Five lakh rupees in the case of the General Provident Fund available only for government employees in India and where employers do not contribute and Two lakhs and fifty thousand rupees in other cases.

7. Illustration:  Mr. Sanjeev is a salaried employee and his salary details and statutory contribution in Employee Provident Fund (EPF) & Voluntary contribution are as follows: –

Sl Particulars FY 2021-22
(a) Opening Balance as of 01st Apr 2021 ( Closing Balance on 31st March 2021) Rs  50,00,000
(b) Basic + DA Rs. 1,00,000 pm
(c ) Contribution in Voluntary PF Rs. 18,000 pm
(d ) Statutory Contribution Rs. 12,000 pm
(e) Rate of Interest 8.5% per annum

7.1 PF Interest Calculation for FY 2021-22

(Amount in Rupees)

MMYY Monthly Contribution Cumulative balance available at the end of the month Interest @ 8.5% pa on balance at the end of the month. Non-Taxable Taxable
Apr 2021 30000 30000 213 213
May 2021 30000 60000 425 425
June 2021 30000 90000 638 638
July 2021 30000 120000 850 850
Aug 2021 30000 150000 1063 1063
Sep 2021 30000 180000 1275 1275
Oct 2021 30000 210000 1488 1488
Nov 2021 30000 240000 1700 1700
Dec 2021 30000 250000 1771 1771
270000 142 142
Jan 2022 30000 300000 2125 1771 354
Feb 2022 30000 330000 2338 1771 567
Mar 2022 30000 360000 2550 1771 779
Total     16578 14736 1842

7.2 Amount to be transferred to Non- Taxable Account & taxable Account  as of 01st April 2022

Sl Particulars Non-Taxable Account Taxable Account Total
(a) Opening  Balance as of 01 Apr 2021 50,00,000  50,00,000
(b) Contribution made up to threshold limit / excess of limit in 2021-22    2,50,000 1,10,000    3,60,000
(c ) Interest accrued on the amount within threshold / above threshold limit 14736 1842      16,578
Closing Balance as on 31 Mar 2022 5264736 111842

7.3 Rs. 1842/- is to be added to the employee’s taxable income and tax will be payable by him according to his tax slab.

TDS of Rs. 184/- (@ 10% on 1842/-) will be deducted under section 194 A by EPFO and the same will be reflected in his Form 26AS as TDS deducted.

The balance that is available at the end of the year 2021-22 will be the opening balance for the year 2022-23.

8. The notification issued by CBDT has finally put to end the ambiguity which arose with the introduction of taxation of interest on provident funds with contributions above the specified threshold.

Disclaimer: The calculation is solely based on the author’s interpretation & understanding of the provision. The suggestions and feedback are always welcome.

The author can be approached at [email protected]

(Republished with Amendments)

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9 Comments

  1. Tarun Dua says:

    Please clarify, will the interest also calculated on the opening balance of 1/4/2022 + contribution excess of 2.5 lakh in the FY 22-23 or only on 22-23 excess contribution

    1. Anita Bhadra says:

      The interest will certainly be calculated and paid on the opening balance as well.
      As long as a tax on interest is a concern, it shall be only on excess contributed during the year and not on opening balance in FY 22-23 or subsequent years ( This is my view, nowhere it is specified in a clear manner)

  2. Anita Bhadra says:

    Agreed
    Thanks a lot for your valuable feedback.
    Requested the moderator to replace the amended version of the article.
    Inconvenience is highly regretted

  3. T Thamendran says:

    In the PF interest calculation [Refer 7.2] , interest on excess over 2.5 lakhs is taxable, so for the month of Jan to Mar, interest of Rs.1771/- in each month should be exempted because it belogns to the contribution upto 2.5 lakhs.

    1. LOVELESH MEHTA says:

      Totally agreed with you sir, Interest on contribution upto Rs 250000 is not taxable, interest on contribution over & above 250000 is taxable. So above example has to be rectified.

    2. Lovelesh Mehta says:

      Totally agreed with you sir. Interest on Contribution upto Rs. 250000 is not taxable, so interest on contribution over & above 250000 is taxable. So in this example In Jan interest on only 50000 (30000+20000) contribution is taxable i.e 354, same in feb & mar on 80000 & 110000 i.e 567 & 779 respectively. So Total Taxable interest is 142+354+ 567+779 =1842, not 7155 as mentioned above in artiicle.

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