Taxability of Provident Fund of Salaried Person at the Time of Retirement

Summary: Under Section 10(11) of the Income Tax Act, 1961, payments received from recognised provident funds, including those governed by the Provident Funds Act, 1925, are typically exempt from tax. However, a significant amendment introduced from Assessment Year 2022-23 onwards has altered the tax treatment of interest earned on employee contributions. Interest accrued during the financial year on an employee’s contribution exceeding Rs. 2.5 lakh in that year becomes taxable. This threshold is increased to Rs. 5 lakh if the provident fund does not receive any contribution from the employer. A separate matter concerns the taxability of interest that accrues on the Provident Fund balance after an employee retires. While Section 10(11) exempts payments from the fund, an Income Tax Appellate Tribunal (ITAT) ruling from Bangalore in the case of Assistant Commissioner of Income tax Vs. Dilip Ranjekar has held that the exemption under Section 10(11) applies in the context of an employer-employee relationship. Once this relationship ceases upon retirement, interest credited to the account subsequently may not be covered by this specific exemption and could be considered taxable income for the individual.

Section 10, of the Income Tax Act, 1961 clarify about the Incomes which do not form part of Total Income. Sub section (11) of this Section 10 read as under:

Any payment from a provident fund to which the Provident Fund Act, 1925, applies [or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette]

[Provided that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1^st day of April, 2021 and computed in such manner as may be prescribed;

Provided further that if the contribution by such person is in a fund in which there is no contribution by the employer of such person, the provision of the first proviso shall have the effect as if for the words two lakh and fifty thousand rupees, the word five lakh rupees had been substituted.]

From the above section 10(11), it is very much clear that, the amount received from a provident fund to which the Provident Funds Act, 1925 applies or from a Public Provident Fund Account. However from assessment year 2022-23 and onwards provision of Section 10(11) will not apply to income by way of interest accrued during the previous year in the account of a person if the amount or the aggrade of amounts or contribution made by that person exceeding Rs.2,50,000 in any previous year in that fund, on or after 1^st April, 2021 and computed in the prescribed manner. If the contribution by such person, i.e. employee, is in a fund in which there is no contribution by an employer of such employee, monetary limit of Rs.2,50,00 is increased to Rs.5,00,000 and hence income by way of interest accrued during the previous year in the account of such employee not exceeding Rs.5,00,000 in any previous year in that fund on or after 1^st April, 2021 and computed in the prescribed manner is exempt u/s 10(11).

From the following table, we are able to understand the contribution by employer and employee and interest to know about taxability.

*** If the contribution of provident fund is credited by employer the amount up to Rs. 2,50,000 is exempt and if the contribution is not credited by employer the amount of Rs.5,00,000 is exempt.

The question may arise that after the retirement of an employee, interest on EPF is exempt?

As per section 10(11), credited amount in the account of employee paid to him is exempt. After retirement he is not an employee and EPF account is continue, the interest credited to the account is exempt?

On the same issue Assistant Commissioner of Income tax Vs. Dilip Ranjekar 98 taxman.com 362 ITAT (Bangalore) it was decided that as there is no relationship of employer/employee after retirement, deduction u/s 10(11) is not allowable and will be considered as income of an employee.