CBDT notifies how to calculate taxable interest on PF contribution

The tax provisions relating to the investments in Provident Fund have remained unchanged for many years. As per the previous law, a portion of 12% of salary had to be contributed by the employer and employee. Any excess employer contribution above 12% of the salary was taxable.

However, in the Union Budget 2020, employers contribution to Provident Fund, National Pension Scheme (NPS) and Superannuation Fund over Rs.7,50,000 was brought under the ambit of taxability. Any excess contribution beyond Rs.7,50,000 would be taxed as perquisites in the hands of the employee. The amendment intended to bring the high-income earners excess benefits under the taxability net.  

Further, the Union Budget 2021 introduced taxability on the interest accrued on the Employees’ Provident Fund (EPF) account for contributions over Rs.2,50,000. The government intended to rationalise the tax exemption for the high-income earners who earned tax-free income by putting a threshold limit.  

Today, CBDT issued a notification stating how the taxable interest will be calculated relating to the contribution to the Provident Fund or Recognised Provident Fund.

This amendment in the income tax rule shall become applicable from 1 April 2022. 

The notification stated that for calculating the Provident Fund contribution taxable interest, separate accounts should be maintained for all the financial years starting from the current financial year 2021-22. Two different accounts, one with taxable contribution and another with non-taxable contribution, shall be maintained for all the subscribers. 

Calculation of non-taxable contribution

 (A)- Aggregate of the following:

  1. Closing balance in the account as of 31 March 2021
  2. Any contribution made by the person in the account for each financial year starting from F.Y. 2021-22 is non-taxable, i.e. below Rs.2,50,000 or Rs 5,00,000 threshold, as the case may be. 
  3. Interest accrued on the closing balance as of 31 March 2021, as well as interest accrued on the non-taxable contribution for each financial year starting from F.Y. 2021-22

(B) – Reduced by withdrawal from such an account. 

Calculation of non-taxable contribution = (A) Less (B)

Calculation of taxable contribution 

 (A)- Aggregate of the following:

  1. Any contribution made by the person in the account for each financial year starting from F.Y. 2021-22 is taxable i.above Rs.2,50,000 or Rs.5,00,000 threshold, as the case may be. 
  2. Interest accrued on the taxable contribution for each financial year starting from F.Y. 2021-22

(B) – Reduced by withdrawal from such an account. 

Calculation of taxable contribution = (A) Less (B)

The threshold limit for non-taxable Provident Fund contribution for employees where the employer does not contribute is Rs.5,00,000 (as amended). In all other cases, the threshold limit is Rs.2,50,000.

Let us understand this using an example:

Mr A has a PF balance of Rs.5,50,000 (including interest) as of 31 March 2021. 

He works with a private company and has contributed Rs.3,50,000 (total contribution) into the PF account in F.Y. 2021-22. Assuming an interest of 8.5% will be received on the contribution made. 

What will be his taxable as well as a non-taxable contribution for F.Y. 2021-22?

Answer : 

Let us separate the contribution into taxable as well as non-taxable. 

Particulars Taxable contribution (Rs) Non-taxable contribution (Rs)
Closing balance as of 31 March 2021 (including interest accrued) 5,50,000
A contribution made in FY 2021-22 1,00,000 2,50,000
Interest accrued for F.Y. 2021-22 8,500* 21,250*
Total  1,08,500 8,21,250

*Assuming deposit is made at the start of the financial year

The notification issued by CBDT provides clarity on an essential aspect that concerns the salaried employees who contribute towards provident fund schemes.

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in

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