Taxability of contribution made to PF fund and Interest thereon

Section 10 under Chapter III of Income Tax Act,1961 says about ‘INCOME WHICH DO NOT FORM PART OF TOTAL INCOME’

Pre amendment, while computing the total income of  previous year of any person , any income falling under clause 11 and 12 of section 10 shall not be included in the total income of the assessee which covers our topic .

Pre amended Section 10(11) and 10(12) of the Income Tax Act provides an exemption for the contribution made to provident fund and the interest thereon.

In line with the amendments which have been made under abovementioned sections by Finance Act, 2021 w.e.f. 01.04.2022. The provision of Sec 10(11) and Sec 10(12) shall not applied to the income by way of interest accrued during the previous year in account of a person to the extent aggregate amount of the contribution made by that person exceeds 2,50,000 in any previous in that fund on or after 01.04.2021.

If the contribution is made by a person in such fund in which there is no employer contribution, than the amount of Rs 2,50,000 substituted with Rs 5,00,000.

Clarification on Computation Mechanism :

The notified Rule 9D vide Notification No 92/2021 dated 10.08.2021 clarifies on the computation mechanism of the taxable interest component. Further, the requirement of maintenance of separate accounts would add more complexities on EPFO as well as those employers managing their EPF account of the employees.

For the purposes of this rule,-

(a) Non-taxable contribution account shall be the aggregate of the following, namely:-

(i)  Closing balance in the account as on 31^st Mar 2021;

(ii) Any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous years, which is not included in the taxable contribution account; and

(iii)Interest accrued on sub- clause (i) and sub- clause (ii), as reduced by the withdrawal, if any, from such account;

(b) Taxable contribution account shall be the aggregate of the following, namely:-

(i) contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit i.e Rs 2,50,000/ 5,00,000; and

(ii) interest accrued on sub- clause (i), as reduced by the withdrawal, if any, from such   account.

Numerical example of how EPF will be taxed

Suppose, an employee having Rs 20,00,000 in his EPF account makes a contribution of Rs  4,00,000 towards the EPF as well as the employer is making a similar contribution in a particular year. In this case, the contribution would be bifurcated as follows:

Any withdrawal in the previous year and onwards should be adjusted first to the taxable component of EPF/GPF contribution to arrive at net taxable corpus to calculate the interest income. We are of this view because income tax law has never been harsh to any employee except to the situation of disobedience of tax laws.

EPFO to issue TDS certificate

As per the provisions of Income Tax Act, every person who deducts TDS while making payment to any person, is under an obligation to issue TDS certificate to that assessee within a prescribed limit of time. This certificate acts as a evidence based on which the assessee can claim credit of TDS while filing his/her Income Tax Return. Thus EPFO will have to issue TDS Certificates to those employees for whom tax was deducted or withheld.

Conclusion :

Effective from FY 2020-21, the aggregate of exemption in respect of employer contribution to PF, Superannuation and National Pension System was limited to Rs 7.5 lakh, and the interest accrued on such taxable contribution was also made taxable.

The objective behind this was to limit the exemption available under these schemes, and to ensure that individuals contributing significantly to these schemes were not unduly benefitted, and had to pay taxes beyond a certain limit. On the basis of one of the article, if we look at it from a PF perspective, this would impact only employees with an annual basic salary over Rs 62.50 lakh . In practice, however, as employees are contributing to PF, NPS and superannuation, hence the impact exists even at salary levels lower than this.