How to calculate taxable portion of interest on PF contribution?

 1. About Provident Funds : 

Provident Fund is a retirement saving plan in which both employee and employer contrib[1]ute a fixed sum every month. The amount ac[1]cumulated in the funds and interest earned thereon is paid to the employee on his re[1]tirement. However, an employee, in certain circumstances, is allowed to withdraw a sum from his provident fund account even before his retirement.

 

2. Types of Provident Fund

The provident funds can be categorized into the following types:

2.1. Statutory Provident FundThis Fund is set up under the Provident Fund Act, 1925, which is meant only for employ[1]ees working in Government or Semi-Gov[1]ernment organizations, local authorities, universities, recognized educational institu[1]tions or railways.

2.2. Recognized Provident FundIt is a provident fund which has been and continues to be recognized by the CIT in ac[1]cordance with the rules contained in Part of the Fourth Schedule to the Income-tax Act. It also includes a fund established un[1]der the Employees’ Provident Fund Act, 1952. Such a fund is maintained in banks, insurance companies, factories and business houses in the private sector.

2.3. Unrecognized Provident FundThese funds are those funds which have not been recognized by the CIT in accordance with the rules contained in Part A of the Fourth Schedule to the Income-tax Act. It can be maintained by any institution in pri[1]vate sector.

2.4. Public Provident FundAny resident individual can contribute in Public Provident Fund. Unlike EPF, contribu[1]tion in PPF is voluntarily and it is only indi[1]vidual himself who can contribute to PPF.

 

3. Taxability of provident fund

The tax implications in case of provident fund arise at the time of contribution, ac[1]crual of interest and withdrawal. The tax[1]ability can be explained with the help of the following table:

Treatment of	Recognised Provident Fund (RPF)	Statutory Provident Fund (SPF)	Unrecognised Provident Fund (UPF)	Public Provident Fund (PPF)
Employer’s Contribution	Contribution up to 12% of basic salary + DA is exempt from tax. However, it shall be taxable in the following two scenarios: (a) Any contribution above 12%; (b) Any contribution above Rs. 7,50,0001 .	-	Not Taxable	-
Employee’s Contribution	Eligible for deduction under Section 80C	Eligible for deduction under Section 80C	Not eligible for deduction under Section 80C	Eligible for deduction under Section 80C
Interest earned on PF	Exempt from tax. However, it shall be taxable in the following two scenarios: (a) Interest above the notified rate; (b) Interest relating to the employee’s contribution above Rs. 5 lakh, in case no contribution is made by employer; (c) Interest relating to the employee’s contribution above Rs. 2.5 lakh, in case employer has also contributed to the fund	Exempt from tax. However, it shall be taxable in the following scenarios: (a)Interest relating to the employee’s contribution above Rs. 5 lakh, in case no contribution is made by employer; (b)Interest relating to the employee’s contribution above Rs. 2.5 lakh, in case employer has also contributed to the fund.	Not taxable at the time of accrual	Exempt from tax
Withdrawal after 5 years	Exempt from tax	Exempt from tax	Aggregate of the following shall be taxable: (a) Employer’s contribution; (b) Interest on employer’s contribution; and (c) Interest on employee’s contribution	Exempt from tax
Withdrawal before 5 years	Total income is computed as if the fund is not recognised from the beginning.	Exempt	Aggregate of the following shall be taxable: (a) Employer’s contribution; (b) Interest on employer’s contribution; and (c) Interest on employee’s contribution	-

4. Amendment by the Finance  Act, 2021

As interest on the contribution made to stat[1]utory provident fund, recognised provident fund and the public provident fund is ex[1]empt from tax at the time of accrual as well as withdrawal, the Government noticed that some employees are contributing a huge amount to these funds. Thus, to curb this practice, the Finance Act, 2021 has amended Section 10(11) and Section 10(12) to provide that exemption shall not be available for the interest income accrued during the previous year on the recognised and statutory provi[1]dent fund in the account of the person to the extent it relates to the contribution made by the employees in excess of Rs. 2,50,000 in a previous year. However, if such person has contributed in a fund in which there is no contribution by the employer, limit of Rs. 2,50,000 shall be increased to Rs. 5,00,000.The amount of such interest income shall be computed as per the prescribed rules.

 

5. Method of computation of  taxable interest

The CBDT has notified2 Rule 9D for calcu[1]lation of the taxable portion of interest pertaining to the contribution made to a statutory or a recognized provident fund in excess of threshold limit of Rs. 2.5 lakh or 5 lakhs as the case may be.It provides that separate accounts within the provident fund account shall be main[1]tained during the previous year 2021-22 and onwards for the taxable and non-taxable contribution made by the person.

5.1. Computation of non-taxable portionThe non-taxable contribution to the provi[1]dent fund account shall be computed in the following manner:Particulars AmountAggregate of the following:(a) Closing balance in account as on 31-03-2021(b) Contribution by a person in finan[1]cial year 2021-22 and onwards to the account (not being a taxable contribution)(c) Interest accrued on (a) and (b) aboveLess: Amount withdrawn from the said accountxxxxxxxxx(xxx)Non-taxable contribution to account xxxThe interest accrued in the non-taxable con[1]tribution account shall continue to be ex[1]empt under Section 10(11) or Section 10(12).

Particulars	Amount
Aggregate of the following:
(a) Closing balance in account as on 31-03-2021	xxx
(b) Contribution by a person in finan[1]cial year 2021-22 and onwards to the account (not being a taxable contribution)	xxx
(c) Interest accrued on (a) and (b) above	xxx
Less: Amount withdrawn from the said account	(xxx)
Non-taxable contribution to account	xxx

 

5.2. Computation of taxable portion

The taxable contribution to the provident fund account shall be computed in the fol[1]lowing manner:The interest accrued in the taxable contri[1]bution account shall be taxable under the head ‘Income from other sources’.

Particulars	Amount
Aggregate of the following:
(a) ntribution by a person in finan[1]cial year 2021-22 and onwards to the account in excess of threshold limit (Rs. 2.5 lakhs/Rs. 5 lakhs)	xxx
(b) Interest accrued on (a) above	xxx
Less: Amount withdrawn from the said account	(xxx)
Taxable contribution to account	xxx

 

6. Illustration

Mr. A is working in a software consultancy firm. He maintains an EPF account and his opening balance is Rs. 5,50,000. His annual CTC is Rs. 30 lakhs with break-up as under:

 

Particulars	Monthly	Annual
Basic salary	2,00,000	24,00,000
Special allowance	24,200	2,90,400
Employee’s contribution to PF (12% of basic	24,000	2,88,000
salary)
Employer’s contribution to PF	1,800	21,600
Total CTC	2,50,000

 Computation of taxable and non-taxable contribution to PF:

Particulars	Non-taxable contribution	Taxable contribution
Opening balance	5,50,000	-
Contribution during the year:
(a) Up to Rs. 2,50,000	2,50,000	-
(b) In excess of Rs. 2,50,000	-	38,000
(Rs. 2,88,000 less Rs. 2,50,000)
Total balance (before interest)	8,00,000	38,000
Interest for the financial year 2021-22 (assuming rate of interest 8.5%)	68,000	3,230
Interest income of Rs. 3,230 on taxable contribution to the provident fund shall be taxable in the hands of the employee in the assessment year 2022-23 under the head income from other sources. If the amount of interest exceeds the threshold limit prescribed under Section 194A (Rs. 5,000), the tax shall be de- ducted on the same. In such a case, the opening bal- ance for the next year shall be computed by consid- ering the interest amount after TDS.

 

1.    The excess contribution shall be taxable only if the aggregate amount of contribution made by the employer to the account of employee in a Recognised Provident Fund, National Pension Scheme and Superannuation Fund exceeds Rs. 7,50,000. In this situation, the excess amount so contributed is taxable as perquisite in the hands of employee.

2.    Notification No. 95/2021, dated 31-08-2021