1. Further to my article Taxability of Interest on Excess PF Contribution dated 11.02.2021, an attempt has been made in this article , to explain the new threshold limit of tax exemption and the manner of tax computation.
The Government has increased the deposit threshold limit to ₹5 lakh per annum in the provident fund for which interest would continue to be tax-exempt if there is no employer contribution. This announcement by the Finance minister Nirmala Sitharaman was part of the amendments made to the Finance Bill, 2021 at the time of passing of the Bill in the Lok Sabha on March 23.
3. PROVIDENT FUNDS WHERE EMPLOYER DO NOT CONTRIBUTE: General Provident Fund (GPF) is a type of provident fund where employers do not contribute.
Thus, the amendment proposed by Finance Minister Nirmala Sitharaman to the Budget provision related to the capping of employee provident fund contribution for tax exemption is only meant for the subscribers of the General Provident Fund.
4 WHAT IS THE GENERAL PROVIDENT FUND (GPF)? The General Provident Fund (GPF) is a type of PF account that is available only for government employees in India.
4.1 All the temporary government servants after a continuous service of one year, all permanent government servants, and all re-employed pensioners (other than those eligible for Contributory Provident Fund) are mandatorily required to subscribe to the GPF.
4.2 The amount of subscription for the GPF is fixed by the subscriber himself. However, the contribution rate should not be less than 6% of the total emoluments of the employee. The maximum contribution is 100% of the employee’s salary.
4.3 The interest rate on the GPF funds is revised by the government from time to time depending on the prevailing market interest rate.
5. The increased threshold limit to ₹5 lakh per annum in the provident fund for which interest would continue to be tax-exempt is applicable for General Provident Fund only and there is no change in provisions for normal EPF subscriber, where both employer and employee are at least contributing 12 percent each of basic plus DA and contribution for tax-free interest is capped at ₹2.5 lakh.
6. EMPLOYEE PROVIDENT FUND: The Employee Provident Fund (EPF) is available to salaried people in the organized sector and contributions to the fund are made by both the employee and the employer.
6.1 EPF is the government-backed saving scheme that provides a social security net to the employees working in the organized sector.
6.2 Any organization having 20 or more employees is mandated to be registered under the EPF scheme and provide its benefits to its employees.
6.3 EPF is managed by the Employees’ Provident Fund Organization (EPFO) under the Employees’ Provident Fund and Misc. Provisions Act, 1952.
6.4 Employees enrolled under the EPF need to contribute 12% of their basic salary towards the EPF fund and an equal contribution is made by the employer on a monthly basis.
6.5 The interest rate on the EPF fund is decided by the government from time to time which is currently fixed at 8.50%
7. VOLUNTARY PROVIDENT FUND (VPF) Voluntary Retirement Fund is the voluntary fund contribution from the employee towards his provident fund account. This contribution is beyond the 12% of contribution by an employee towards his EPF. The maximum contribution is up to 100% of his Basic Salary and Dearness Allowance. Interest is earned at the same rate as the EPF.
7.1 The VPF option is available only to salaried individuals who receive their monthly payments through a specific salary account.
7.2 VPF is the extension of EPF. In an EPF account, a person has to mandatorily give 12% of his Basic Salary and Dearness Allowance towards the fund. In a VPF, it is a voluntary contribution with a maximum limit of 100%.
8 Employees’ Provident Fund (EPF) for the organised sector, GPF for government employees and Public Provident Fund (PPF) for all resident Indians are the three main provident funds in India.
9. Budget 2021-22 has rationalized tax-free income on provident fund contribution by high-income earners by making the exemption on interest income earned on annual contribution to ₹2.5 lakh applicable to EPF & VPF.
9.1 The government is yet to notify the way interest will be computed. However, an attempt has been made to explain the manner of interest calculation with the help of an illustration.
10. ILLUSTRATION: Mr. Sanjiv 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||FY 2022-23|
|(a)||Basic +DA||Rs 1,00,000 pm||Rs 1,20,000 pm|
|(b)||Contribution in VPF||Rs. 18000 pm||Rs. 20000 pm|
|(c)||Statutory Contribution||Rs. 12000 pm||Rs. 14400 pm|
|(d)||Rate of Interest||8.5% pa||8.5% pa|
THE FINANCIAL YEAR 2021-22
|MMYY||Monthly Contribution ( EPF + VPF)||Cumulative Balance is available at the end of the month.||Interest @ 8.5% on balance at the end of the previous month|
Note : Calculation of the total EPF Balance that will be present in the account at the end of the year is the addition of the total balance that is present at the end of the last month and the total interest that has been generated. Therefore, the total balance available in the account is:
Rs. 3,60,000 + Rs.14,025 = Rs. 3,74,025
10A CALCULATION OF TAXABLE INTEREST FOR 2021-22: –
The taxable interest to be calculated at the end of the year 2021-22
The balance at the end of the year is Rs 3,74,025/-
The taxable interest amount will be
(3,74,025-2,50,000) *8.5% = Rs 10,542.12
FINANCIAL YEAR 2022-23
The balance that is available at the end of the year 2021-22 will be the opening balance for the year 2022-23.
|MMYY||Monthly Contribution (EPF +VPF) Rs.||Cumulative Balance is available at the end of the month Rs.||Interest @ 8.5% on balance at the end of the previous month. Rs.|
10B CALCULATION OF TAXABLE INTEREST FOR 2022-23: –
The taxable interest to be calculated at the end of the year 2022-23
The balance at the end of the year is Rs 7,86,825/-
Less: opening balance Rs 3,74,025/-
The taxable interest amount will be
Rs 7,86,825 – (Rs 3,74,025 + Rs. 2,50,000) *8.5%
= Rs. 13, 838/-
Note 1: Since the amount appearing in the opening balance consists of Rs 3,60,000/- on which tax already deducted in the year 2021-22, the same shall be excluded in 2022-23.
Note 2: Since the tax is to be levied on a contribution above Rs 2,50,000, an interest amount of Rs 14,025 /- included in the opening balance shall not be considered for the purpose of tax.
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]