Taxability of interest on PF contributions above Rs. 2.5 lac

With an amendments passed in the Finance Act, 2021, government has take away the benefit of exemption from taxation (w.e.f financial year 01st April, 2021 and onwards)  which was earlier available for an interest income earned by the taxpayers on their provident fund contribution. However, their specific rules to determine their taxability was awaited from the CBDT for a long time.

Now the CBDT has come up with the Notification no. 95/2021 dated 31st August, 2021 and inserted a new Rule 9D under the income tax Rules, which shall be applicable for the FY 2021-22 and onwards.

As per this new Rule 9D, two Provident Fund accounts shall be maintained from the FY 2021-22 and onwards to calculate the portion of interest that is to be taxed for a contribution made above threshold limit which is Rs. 2.5 lacs for other than government employees and Rs. 5 lacs for government employees.

This Rule 9D also specifies the method of arriving the balance of both “Taxable” and “Non Taxable contribution” as follows:-

a) Non Taxable Contribution account shall be the aggregate of the following:

i) Closing balance in the account as on 31st March, 2021.

ii) any contribution made by the person in the account during the previous year 2021-22 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) above.

as reduced by the withdrawal, if any, from such account.

b) Taxable Contribution account shall be the aggregate of the following:-

i) contribution made by the person in a previous year in the account during the previous year 2021-22 and subsequent previous years, which is in excess of the threshold limit as specified above.

ii) interest accrued on sub clause (i) above,

as reduced by the withdrawal, if any, from such account.

Therefore, now if your contribution exceeds the threshold limit of Rs. 2.5 lacs / Rs. 5 lacs (as applicable) annually, the interest earned on such excess contributions will be now be taxable in your hands w.e.f Financial year 2021-22 and onwards.

Author can be reached at cailajindal@gmail.com.