- CA Anita Bhadra
- | Income Tax - Articles- Featured
- 11 Feb 2021
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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.
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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.
Contribution till 31st March 2021 is not subject to tax
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.
Thanks a lot for your humble comment
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.
PPF is being considered independently
So no aggregation will b done
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 .
Clarification in this regard.is still awaited from.CBDT.
It is a ceiling on the annual contribution, hence if the interest is taxed in one fiscal year it would complete the loop for that relevant year. Hence, any contributions made by an employee during a fiscal year will be the deciding criteria for TDS year for that particular year.
The tax is calculated based on total contribution made in a FY. Hence, you invest in March end or April beginning, the calculation will be based on total contribution of PF in one FY. If that amount exceeds 2.5Lac, then the excess amount, interest is taxable. [irrespective of when you put in PF account]
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 ?
Interest on such deposits are not subject to tax as EPF and PPF are separately taxed under proviso
Of section 10(11) & 10(12) respectively
does the taxability will be only in one year? what happens to the interest accruing annually on such excess contribution subsequently?
Clarification from CBDT is awaited in this regard
Very well explained.
Thanks for your humble comment.
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.
It will b taxed under the head ‘ income from other sources.
But will b added to Taxable income of a salaried employee.
As I mentioned , will b taxed like a bank intt
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.
It will be taxed under the head ‘ Income from other sources ‘
Since EPF is related to employees only , hence use the word ‘ will b added to salary .
Ultimate effect will b same.
Taxable income of salaried people will go up