The Lok Sabha has passed the Finance Bill, 2021 on March 23, 2021, with finance minister Nirmala Sitharaman introducing 127 amendments with a view to boost ease of doing business and easing compliance burden. Among the major changes is a tweak in the proposal to tax income on P.F. contribution above Rs. 2.50 lakhs in the previous year. This limit has been revised at Rs.5,00,000/- for the employees contributing to the fund but there is no contribution to such fund by the employer vide Finance Bill 2021 as passed by the Lok Sabha.
Let us understand in detail
The Finance Bill, 2021 proposed that no exemption shall be available for the interest income accrued during the previous year in the recognised 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. This amendment is applicable from the assessment year 2022-23.
This amendment has been proposed as the Government noticed that some employees have been contributing a huge amount to these funds and earning interest free income. Thus, to curb this practice, the Government has proposed such amendment to Section 10(11) and Section 10(12). The amendment proposed that the taxable component shall be computed in such manner as may be provided by rules.
The Finance Bill (Lok Sabha) has added a second proviso to Section 10(11) and Section 10(12) that if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee to that fund in excess of Rs. 5,00,000 in a financial year.
This amendment is applicable from the assessment year 2022-23. This amendment has been proposed as the Government noticed that some employees have been contributing a huge amount to these funds and earning interest free income. Thus, to curb this practice, the Government has proposed such amendment to Section 10(11) and Section 10(12). The amendment proposed that the taxable component shall be computed in such manner as may be provided by rules.
The Finance Bill (Lok Sabha) has added a second proviso to Section 10(11) and Section 10(12) that if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee to that fund in excess of Rs. 5,00,000 in a financial year.
This can be better understood considering the below example:
| Amount Contributed by assessee during Previous Year | Whether employer contributing to fund? | Whether interest earned shall be taxable?
|
How much interest of employee’s contribution shall be taxable?
|
| Rs. 1,50,000 | Yes | No | Not taxable till amount Rs.2,50,000/- |
| Rs. 2,50,000 | Yes | No | Not taxable till amount Rs.2,50,000/- |
| Rs. 2,50,000 | No | No | Not taxable till amount Rs.5,00,000/- |
| Rs.4,00,000 | Yes | Yes | Interest on contribution of Rs.1,50,000/-( 4,00000-250000) |
| Rs.4,00,000 | No | No | Not taxable till amount Rs.5,00,000/- |
| Rs.5,50,000 | No | Yes | Interest on contribution of Rs. 50,000/-(5,50,000-5,00,000) |
| Rs.5,50,000 | Yes | Yes | Interest on contribution of Rs. 300,000/-(5,50,000-2,50,000) |
The interest income shall be taxable under the head ‘Income from other sources’ as this income does not generated from 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.
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Being a member of PSU-EPF, Where should I book interest income first or second proviso of sec 10-(11 or 12)?
What about taxability of Interest Income on the contribution in excess of Rs. 2.50 lacs / Rs. 5 lacs made during the year in subsequent years?.
Suppose continuation made Rs. 4 lacs / Rs 6.50 lacs during FY 2020-21. Taxable amount during FT 2021-22 would be Rs 1.50 lacs in each case.
What would be taxability on the interest earning on same contribution made in FY 2020-21 in subsequent years?
Pf withdrawal is taxable