Till FY 2020-21 contribution to Recognised Provident fund (RPF) was eligible for EEE (Exempt- Exempt- Exempt)

This EEE implied that full exemption from tax is given on

(1) investment in PF (u/s sec 80C),

(2) Interest on PF (u/s 10 upto 9.50%) and

(3) withdrawal of PF (u/s 10(12) subject to 5 year service condition)

However through Finance Act 2021 (i.e from FY 2021-22), an amendment has been brought through which interest on employee’s contribution in excess of Rs 2,50,000 per annum will be taxable.

For example: If an employee has contributed Rs 4 Lacs in PF account then interest will be applicable on interest earned on Rs 1.50 Lacs (i.e 4 Lacs -2.50 lacs).

For method of computation of interest, Rule 9D has been inserted via Notification No. 95/2021-Income Tax Dated:  31st August, 2021.

This Rule 9D provides for segregation of PF account balance into taxable and non-taxable portion within same account.

The components of taxable and non-taxable portion are as below:

Non-Taxable Portion Taxable Portion
(i) closing balance in the account as on 31st day of March 2021;
(ii) any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous years, which is not included in the taxable contribution account; and (i) contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit (for RPF limit is Rs 2.50 Lacs); and
(iii) interest accrued on sub- clause (i) and sub- clause (ii) (ii) interest accrued on sub- clause (i),
as reduced by the withdrawal, if any, from such account; as reduced by the withdrawal, if any, from such account

We can understand the above with the help of following example:

Example) Say for FY 2021-22 Mr X contributes Rs 30,000 per month in his PF account. In this case his annual contribution is Rs 3,60,000 (i.e greater than Rs 2.50 Lacs) and hence he need to pay interest on PF contribution of Rs 1.10 lacs (Rs 3.60 Lacs  – Rs 2.50 lacs).

On detail calculation we can see that taxable interest amount will be Rs 1063.

Month Employee’s PF contribution for Taxable Interest calculation Interest till end of year Exempt Interest Taxable Interest
April 30,000.00 2,337.50 2,337.50
May 30,000.00 2,125.00 2,125.00
June 30,000.00 1,912.50 1,912.50
July 30,000.00 1,700.00 1,700.00
August 30,000.00 1,487.50 1,487.50
September 30,000.00 1,275.00 1,275.00
October 30,000.00 1,062.50 1,062.50
November 30,000.00 850.00 850.00
December 30,000.00 637.50 212.50 425.00
January 30,000.00 425.00 425.00
February 30,000.00 212.50 212.50
March 30,000.00
Interest on current year contribution 14,025.00 12,962.50 1,062.50

At end of FY 2021-22 his taxable portion of PF will be as below:

Particulars Employee’s Taxable Portion of PF Balance
Opening Balance at beginning of Financial Year
Fresh contribution by employee during the year 110,000
Interest on PF 1,063
Closing Balance at end of Financial Year 111,063

Now say Mr X contributes Rs 31,000 per month for FY 2022-23 (i.e next year).

Taxability of interest on Recognised provident fund (Along with calculator)

In such a case his annual contribution will be Rs 3,72,000 (Rs 31,000 X 12) and interest will be taxable on Rs 1,22,000 (i.e 3.72 Lacs -2.50 Lacs) along with on opening balance of taxable portion of PF (i.e Rs 1,11,063).

For FY 2022-23 his interest calculation will be as below:

Month Employee’s PF contribution for Taxable Interest calculation Interest till end of year Exempt Interest Taxable Interest
April 31,000 2,415 2,415
May 31,000 2,196 2,196
June 31,000 1,976 1,976
July 31,000 1,757 1,757
August 31,000 1,537 1,537
September 31,000 1,318 1,318
October 31,000 1,098 1,098
November 31,000 878 878
December 31,000 659 43 616
January 31,000 439 439
February 31,000 220 220
March 31,000
Interest on current year contribution 14,493 13,218 1,275
Interest on Opening Balance 9,440
Total PF interest taxable 10,715

At end of FY 2022-23 his taxable portion of PF will be as below:

Particulars Employee’s Taxable Portion of PF Balance
Opening Balance at beginning of Financial Year 111,063
Fresh contribution by employee during the year 122,000
Interest on PF 10,715
Closing Balance at end of Financial Year 243,778

So for FY 2022-23, taxable interest on PF would be Rs 10715 and balance of taxable portion of PF will be 2,43,778.

Such interest will be taxable under the head Income from Other sources and not under the head salaries. Applicable TDS u/s 194A @ 10% will be deducted on amount of interest by EPFO (Employees Provident Fund Organization).

The rate of interest on PF for last few years is given below:

Financial Year Rate of Interest p.a.
2021-22 (proposed) 8.50%
2019-2020 to 2020-21 8.50%
2018-2019 8.65%
2017-2018 8.55%
2016-2017 8.65%
2015-2016 8.80%
2013-2015 8.75%
2012-2013 8.50%
2011-2012 8.25%
2010-2011 9.50%
2005-2006 to 2009-2010 8.50%

Beside it excel utility to compute interest on taxable PF portion is also attached.

This will surely help all the salaried people to calculate taxable amount of Interest on PF and also to take decision as to how much amount should be contributed by way of VPF (Voluntary provident fund).

Access Denied! Only Regstered Users Can Download The File "Taxability of interest on Recognised provident fund (Along with calculator)". Register Here or Login

Author Bio

Qualification: CA in Job / Business
Company: N/A
Location: Mumbai, Maharashtra, India
Member Since: 04 Feb 2018 | Total Posts: 64
I am a working professional having more than 13 years of experience in field of Income Tax, TDS, VAT, Sales tax, GST and accounting. Can be contacted at [email protected] View Full Profile

My Published Posts

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Telegram

taxguru on telegram GROUP LINK

Review us on Google

More Under Income Tax

2 Comments

  1. ANITA BHADRA says:

    Well Explained.
    A clear guidelines to EPFO / PF Trust for methodology of tax component is still awaited from the Government .

    EPFO/Trust need to keep track of tax on accrued interest so that there won’t be tax again at the time of final withdrawal

  2. NARESH KUMAR GUPTA says:

    In case of PF trust, How the TDS will be deposited? . because interest is accrued and not having any cash to pay the TDS in hand of trust.

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

May 2022
M T W T F S S
 1
2345678
9101112131415
16171819202122
23242526272829
3031