- CA Anita Bhadra
- | Income Tax - Articles- Featured |
- 11 Feb 2021
- 111,696 Views
- 77 comments
1. The Union Budget 2021 has proposed taxing the income on provident fund contributions of over Rs. 2.5 lakh a year. As per clause 5 of Finance Bill 2021, the interest on any contribution above Rs 2.5 lakh by an employee to a recognized provident fund will be taxable from 01 April 2021.
2. Existing Statutory Provisions Section 10(11) and 10(12) of the Income Tax Act provides an exemption for the statutory provident fund and recognized provident fund respectively. Interest credited every year in the Employee provident fund account (EPF) is exempt from tax. The deposits in EPF fall under the Exempt, Exempt, Exempt (EEE) tax category. Thus, an employee is not liable to pay tax at all three levels – investment, earning, and withdrawal
3. Proposed Amendment: The Finance Bill 2021 proposes to insert Proviso to Sections 10(11) and 10(12) – “providing that the provisions of these clauses shall not apply to the interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of the contribution made by the person exceeding Rs. 2, 50,000 in a previous year on or after the 1st day of April 2021 and computed in such manner as may be prescribed”
3.1 It means that 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.
4. Reason for the Amendment: This amendment has been proposed as the Government noticed that some employees have been contributing a huge amount to these funds. The interest rate on EPF is generally higher than other small savings schemes and fixed deposits that offer guaranteed returns. The higher interest rate on EPF prompts employees to put higher corpus in EPF, which in turn makes it difficult for the government to pay interest on the same.
5. Salient Features of the Proposed Amendment:-
(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/-.
(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.”
6. Manner to tax the Interest:
There would be no double taxation and it will work exactly in the same manner as the way interest income on bank fixed deposits is taxed today.
Such interest component shall be subject to TDS under Section 194(a) by the EPFO. However, prescribed rules are awaited in this regard.
The interest income accruing in respect of the employee’s contribution over Rs. 2, 50,000 shall be taxable under the head ‘Income from other sources’ as it is not accruing from a source emanating from an employer-employee relationship.
This interest income will become part of the total taxable income of the taxpayer. There are no special rates for the taxability of this interest. Hence, such income shall be taxed at the prevailing income tax rates.
7. Illustration Mr. X’s total contribution (including voluntary provident fund) to Employee Provident Fund (EPF) is Rs 3, 50,000 in the FY 2021-22. Assuming the rate of interest on EPF is 8.5% per annum; his tax liability will be calculated in the following manner:-
| Financial Year | Employee’s contribution in EPF in a year
(Rs.) |
Contribution liable for tax on interest (b- 2,50,000) | Interest on the excess contribution
(C*8.5%) |
TDS @ 10% under section 194 A
(10% on d) |
Balance taxable amount to be added in taxable salary (d-e) |
| (a) | (b) | (c) | (d) | (e) | (f) |
| 2021-22 | 3,50,000 | 1,00,000 | 8500 | 850 | 7,650 |
In the illustration above, Rs. 8500/- will be added to the employee’s taxable income and tax will be payable by him according to his tax slab. Rs. 850/- will be reflected in his form 26AS as TDS deducted. In case, his tax slab is less than 10%, he will be eligible for a refund of Rs 850/- deducted by the EPFO as TDS.
8. Public Provident Fund (PPF):- A cap of Rs 2.5 lakhs is applicable independently to PPF contribution for claiming interest on PPF. At present, this is not relevant because of the Rs.1.5 lakh limit on contribution to PPF itself. Thus this amendment will not have any impact on PPF contribution.
*****
Disclaimer: The article is for information purposes only.
The author may be approached at [email protected]
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Maam
Kindly confirm that the amount of recovery of CPF advance is not to be counted towards 250000 limit of employees contribution
I think the limit of Rs.2.50 lakhs is raised to Rs.5 Lakhs for EPF+VPF interest chargeable to tax at the time of passing the bill in Loksabha. can you please confirm?
No, The limit of Rs 5,00,000/- is for GPF contribution (Government employees only)
The limit of Rs 5,00,00/- is for Government employees contribution to the general provident fund (GPF) without any employer contribution.
Has the govt come out with guidelines for this EPF tax ? Will it be tax the first year only or will interest on interest would also be taxed in subsequent years …Please let me know
1. Is there any taxability of interest on employer contribution at all? My employer contributes Rs 10 lacs pa. I presume interest income on it is entirely tax free.
2. Interest on excess employee contribution is taxed in current year. Next year, will there be a tax on the interets earned on excess employee contribution of previous year(and since it is compounding, interest on interest) or is it only taxed in first year?
Ma’am/Sir,
I am a state government employee, the opening of my NPS account took around 4 years. Now, I’ve to deposit my share of contribution of around 4 years in one go, so is there any provision to claim tax benefits for contributions pertaining to individual financial years.
im a govt employeeif my contribution and the contribution by employer amounts to 360000 per year and the interest i get for that particular year is 30600 how much tax am i supposed to pay for that interest and since the employer also contributes am i supposed to pay tax for that too please i dont understand the concept properly
There is an amendment in the Total Contribution to Provident fund by Government Employee having no contribution by the employer i.e. 5.00 Lakh
It is correct
Yes, it is correct.
For contribution in GPF , exemption limit is Rs 5,00,000
my monthly income is Rs 50000/- per month. can i deposit Rs 150000/- in PPF before 05 Apr and get full exemption ? as also maximise the interest for the year? i was told that the amount deposited in PPF should be from the taxable income earned during that financial year. therefore technically deposit of Rs 1. % lakh from income of previous FY/savings may not qualify for tax exemption. Request clarify this aspect.
No Such restrictions as per my knowledge.
You can deposit the amount in PPF now itself
Considering that I have made 1L additional contribution for 21-22 over a period of 12 months, the interest gained on this would be about 3-4000/- which will be taxed. If this is taxed in 22-23, the remaining amount will become part of my overall contribution and start gaining compounded interest. Will this also will be taxed every year there onwards??
Refer to my article dated 01st May 2021 for the manner of calculation
Taxability of Interest on Excess PF Contribution-New Threshold Limit & Manner of Tax Computation
Hello , I have the same question.
Does excess contribution become tax free in subsequent years and gets compounded at 8.5? Yes or No
SIR ,I AM AN EMPLOYEE OF PSU–ORIENTAL INSURANCE CO. LTD, I AM A PENSION OPTEE
MY(EMPLOYEE) CONTRIBUTION TO PF IS RS.67896/- AND VPS RS.240000/- AND THERE IS NO CONTRIBUTION OF EMPLOYER IN PF SHEET . IS THE INTEREST ON EXCESS (AMOUNT OF RS.307896-250000=57896) TAXABLE
what about contribution made to Gov. Provident Fund mote than 2.5 lakh in a year
Any contribution in excess of 2,50000/- is in recurring pattern only. How is the illustration of 10% is shown in a fixed deposit pattern?
Not getting your query . Kindly elaborate.
I think he was pointing that your illustration for one year whereas the interest on excess contribution would have been taxed each year onwards and the total excess contribution would itself have been increasing each year.
I have tried to explain the manner of calculation in my article dated 01 May 2021.
Taxability of Interest on Excess PF Contribution-New Threshold Limit & Manner of Tax Computation
Exempted up to Rs 5 Lakhs
I am a PSU employee. Two type provident fund amount is deducted from our salary i.e. CPF( Contributory Provident Fund ) and OPF( Optional Provident Fund). Is 2.5 lac limit is inclusive of CPF and OPF both.
Yes , Total contribution of employess is covered for the purpose ( Statutory & Optional both)
Sir any exemption for scheduled tribe in this regards
Well written.
I have question here.
Suppose my annual (Employee) contribution goes to 300000 (3 lac), the interest will be calculated on 50K and considering 8.5 % interest, the total interest amount would be Rs 4250. Now this will be added to my income (year – April 2020 – Marc 2022).
Question here is what happens in case of financial year (April 2022 – March 2023). In that year, my contribution would be 3 lac (consider no hike in salary). So my interest would be (3 L – 2.5 L) = Rs 4250. Since I had 50K extra in (April 2021 – March 2022) year and I will get interest on this extra 50K amount also in 2022-2023 year also. Should I add 4250 (interest earned in 2022-2023 of 50K from 2021-2022 year) in total income of 2022-2023 year?
Hope I clear my question here.
Even I am confused, can someone clarify this?
What is the confusion ?
I guess its cumulative, i.e., the excess contributions in each year will be tracked till withdrawal.
This is a question for many. I have coming looking around for this particular query only.
In simple terms will the interest earned on the excess contribution, be added back to the corpus and therefore only taxed one time.
OR
Will the interest on this interest (compounding) also subject to tax the next year too
In your example above, what happens to (d) 8500 the next year. Please illustrate.
Frankly, this aspect needs to be dealt with in another article as I have seen many asking the same question on this thread itself!
Thanks in advance!
Indeed a nice explanation for the new rule..
I have a small question… If employee’s contribution is 3.50 lacs and he also invests 1.50 lacs in PPF then what would be the amount liable for income tax. Kindly advise..
madam,
i have 75 Lakhs employees contribution and 15 Lakhs interest on employee contribution upto 31.03.2021.
During the FY 2021-22 i will contribute 2,30,000/- (employees contribution)
interest on 90,00,000(Opening Balance) + 2,30,000/-(CY) is around Rs 2,20,000/-
and i will retire during the Financial year 2021-22.
i will withdraw entire 94,50,000/- on retirement
How much tax i need to pay. whether it is exempted or anything tax liability will arise. Kindly clarify based on the budget amendment.
Regards,
Prabhakara Reddy K
madam,
i have 75 Lakhs employees contribution and 15 Lakhs interest on employee contribution upto 31.03.2021.
During the FY 2021-22 i will contribute 2,30,000/- (employees contribution)
interest on 90,00,000(Opening Balance) + 2,30,000/-(CY) is around Rs 2,20,000/-
and i will retire during the Financial year 2021-22.
i will withdraw entire 94,50,00/- on retirement
How much tax i need to pay. whether it is exempted or anything tax liability will arise. Kindly clarify based on the budget amendment.
Regards,
Prabhakara Reddy K
does the taxability will be only in one year? what happens to the interest accruing annually on such excess contribution subsequently? Example .. Lets say 1 ) In FY 21-22 contributed 1 Lakh excess EPF and paid tax on interest earning on 1 Lakh ..
2 ) In FY 22-23 contributed 1 Lakh excess EPF and paid tax on interest earning on 1 Lakh + Tax need to pay again on interest of excess amount I contributed in FY 21-22 as well ?
I am interested in knowing the answer for this query
Excess amount above 2.5L will be put in separate bucket, and every year tax will be calculated (consider your 1 year FD getting renewed every year). First year, say your excess amount is 1L, interest accrued 8.5k, tak liability 2.5k approx (30% bracket). Again next year excess is 1L. Total in this bucket 2L, interest say 17k, tax 5k. This is just to give you an idea, actual interest calculation will happen on when that money got deposite in excess bucket, i.e. once it crosses 2.5L, may be towards year end, based on that interest will get calculated.
Ma’am, I have a question
If an employee has 15 lakhs balance in PF account and contributes further 6 Lakhs during current FY.
The interest credited will be on entire 21 Lakhs (partially monthly).
will the interest be bifurcated on 15 Lakhs and 6 Lakhs or interest on whole 21Lakhs be taxable?
Really well written article. It has helped to understand the concept of taxation for PF contribution over 2.5L. I have a question which I hope you could help me. Will that 2.5L cap includes employer PF contribution also apart from employee PF and VPF contribution? Everywhere it has mentioned as employees PF contribution and no where spoke about employer contribution. Please share your inputs
nice article… so interest on interest from FY 21-22 will be taxable or exempted from tax ? means in above example will 8500 (additional contribution interest) will be consider as new investment and should be part 2.5 Lac limit… as it will be veery difficult to keep track after few years say 2-3 years when we need to bifurcate current year contribution … Normal interest … additional interest … and most importantly interest on “additional interest” of previous years ? please clarify
Dear Madam,
Well written article with lucid explanation. Being a PSU employee myself can you suggest where to put our VPF Contribution for long term retirement savings as PPF investment is capped at 1.5 Lac , Equity market is risky and NPS has a lock in period
How will taxability be calculated for FY 22-23 for:
1. Interest earned on contribution already made in 21-22
2. Interest on contribution made in 22-23
Mam, If I contribute 3.5 lakhs in 21-22 through VPF and then after I do not contribute in VPF and my PF contribution is lesser than 2.5 lakhs in 22-23, 23-24,… still there will be tax on interest in 22-23 and 23-24?
(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
Mam , As you had explained the above matter what would happen after interest is earned from 1st April 2021 on old contribution made till 31st March 2021. Pls advise the taxability in this case.
Mam, If the interest of old contributions made by Employees and Employers exceeds Rs 2.50 Interest income in FY 2122 this would be taxable , pls advise
Another well written article, Anita. Keep writing!
Good luck.
Nice article. But all the interest from the provident Fund are exempt under section 10(11). Interest from PPF is also exempt u/s 10(11). Hence this amendment will affect PPF as well. Undoubtedly PPF has 1.5 lacs annual limit. But aggregate of amount will include amount from PPF as well.
This also means that for every successive year the interest on that excess PF contribution will be taxable, else it means only first year the interest is taxable and following years you earn for the old contribution at the PF interest rate but tax free.Hence contribution can be made at the end of march month making the taxable interest amount nil .
In case A who is employee in firm called B contributed Rs 2.50 lakhs by way of his contribution of EPF and then also opened a PPF account and contributed Rs 1.50 lakhs .What would be the position of taxation in that event ?
does the taxability will be only in one year? what happens to the interest accruing annually on such excess contribution subsequently?
Very well explained.
Mam,
In the above article once you said “The interest income accruing in respect of the employee’s contribution over Rs. 2, 50,000 shall be taxable under the head ‘Income from other sources’ as it is not accruing from a source emanating from an employer-employee relationship.”
On the other hand in the Illustration you said ” Balance taxable amount to be added in taxable salary (d-e)”.
Kindly clarify as an employee while filing his return of income under which head of income he needs to show the said income.
Mam, in the theoretical part you have mentioned that interest on excess contribution shall be taxable u/h other source, However, in practical illustration you have written that Rs. 8500 will be added in his salary income.
Regards.