Budget 2021 has withdrawn the exemption on interest income earned on Employees’ Provident Fund (EPF) on annual contribution in excess of Rs. 2,50,000. Hence any interest earned on PF Contribution on such excess amount of contribution is chargeable to tax and will be taxable under the head ‘Income from Other Sources’.
For this purpose, amendments have been carried out in the provisions of Income Tax Act, 1961. Budget 2021 has changed the tax rules for determining the taxability of interest income earned on EPF.
This provision is inserted in the statute as a measure of rationalisation of tax- free income on Provident Funds (PFs).
In order to rationalise tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of Rs. 2.5 Lakh. This restriction shall be applicable only for the contribution made on or after 01.04.2021.
Taxability of Interest on EPF where interest income is exempt
Clause (11) of section 10 of the Act provides for exemption with respect to any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 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. Similarly, Clause (12) of this section provides for exemption with respect to the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule.
Instances have come to the notice where some employees are contributing huge amounts to these funds and entire interest accrued/received on such contributions is exempt from tax under clause (11) and clause (12) of section 10 of the Act.
This exemption without any threshold benefits only those who can contribute a large amount to these funds as their share.
Accordingly, it is proposed to insert proviso to clause(11) and clause (12) of section 10 of the Act, providing that the provisions of these clauses shall not apply to the interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of contribution made by the person exceeding two lakh and fifty thousand rupees in a previous year in that fund, on or after 1st April, 2021, computed in such manner as may be prescribed.
These amendments will take effect from 1st April 2022 and shall apply to the assessment year 2022-23 and subsequent assessment years.
Hence, the amount already contributed to the employees' provident fund shall not be impacted with the amendment as the amendment is not made retrospective but is prospective from 01.04.2021 only.
The manner in which such taxable portion of interest income on EPF contribution above the annual contribution limit of Rs. 2,50,000 shall be required to be computed will be notified by the CBDT.
For this purpose, the amendments were carried out in the following provisions of the Income Tax Act, 1961-
Clause 5
(d) with effect from the 1st day of April, 2022,–
(i) in clause (11), the following proviso shall be inserted, namely:–
“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 1st day of April, 2021 and computed in such manner as may be prescribed;”;
(ii) in clause (12), the following proviso shall be inserted, namely:–
“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 1st day of April, 2021 and computed in such manner as may be prescribed;”;
Clause 5 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.
Clause (11) of section 10 provides for exemption with respect to any payment from a provident fund to which the Provident Funds Act, 1925 applies or from any other provident fund set up by the Central Government and notified by it on this behalf in the Official Gazette.
Clause (12) of the said section provides for exemption with respect to the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule.
It is proposed to insert a proviso to such of the aforesaid clauses so as to provide that the provisions of these clauses 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 1st day of April, 2021 and computed in such manner as may be provided by rules.
These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
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