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)
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: –
|(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|
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)