Finance Act, 2021 has amended the provisions of section 10(11) and section 10912) to bring interest on the Statutory Provident Fund of the government employees (GPF) and Employees Provident Fund (EPF) for the employees of the organizations covered by EPFO within the tax net.
Presently, the entire interest on GPF and EPF are exempt from tax. However, from AY 2021-22, interest on tax on employees contribution to PF account in excess of Rs. 2,50,000 in a financial year is subject to tax. Only interest on employees contribution to PF account upto Rs. 2,50,000 in a financial year will remain exempt from tax. This is as per the original amendments proposed in the Finance Bill, 2021 when the same was introduced in the LokSabha on 1st February 2021.
When the Finance Bill, 2021 was passed in the LokSabha on 23.03.2021, then through a government amendment, the provisions of section 10(11) and section 10(12) is further proposed to be amended to provide for an enhanced limit of employees contribution into PF account for availing exemption of interest on such PF contribution from Rs. 2,50,000 to Rs. 5,00,000 only in a case where there is no contribution is made by the employer into the employees’ PF account.
Hence as per the proposed amendment in the Finance Bill, 2021 as passed by the Loksabha, the tax on PF interest shall be determined as follows-
Read more on Taxability of Interest on Employees Contribution to Provident Fund (PF) under different cases
For this purpose, the following government amendments are proposed in the Finance Bill, 2021 as passed by the LokSabha on 23.03.2021-
Text of Final amendment proposed in Section 10(11)
Amendment already proposed in the Original Finance Bill, 2021 when the same was introduced in the LokSabha on 1.2.2021
“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;”:
Amendment in the Finance Bill, 2021 when the same was passed in LokSabha on 23.03.2021
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 provisions o the first proviso shall have the effect as if for the words “two lakh and fifty thousand rupees”, the words “five lakh rupees” had been substituted;
Similar amendments are proposed for section 10(12).
Text of Final amendment proposed in Section 10(12)
Amendment already proposed in the Original Finance Bill, 2021 when the same was introduced in the LokSabha on 1.2.2021
“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;”:
Amendment in the Finance Bill, 2021 when the same was passed in LokSabha on 23.03.2021
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 provisions o the first proviso shall have the effect as if for the words “two lakh and fifty thousand rupees”, the words “five lakh rupees” had been substituted;
Clause (11) of Section 10 covers a provident fund to which the Provident Funds Act, 1925 (19 of 1925) applies and also Public Provident Fund (PPF). A GPF account of a government employee comes under PF Act, 1925.
Similarly, Clause (12) of section 10 covers the Employees Provident Fund (EPF) to which Employees Provident Fund & Miscellaneous Provisions Act 1952 applies.
As per EPF Rules, an employer is compulsorily required to contribute to the EPF account of the employee at the rate of 12% of the employee’s basic salary and DA. An employer cannot absolve from the mandatory requirement of deposit to EPF account under any circumstances. Hence there cannot be a situation when an employee will be able to enjoy the enhanced limit of Rs. 5,00,000 under section 10(12).
So far as section 10(11) is concerned, two PF accounts are covered under this clause. One is a GPF account and the other is a PPF account.
In the case of the GPF account, government do not contribute to the GPF account of the employee. Hence, the enhanced limit of Rs. 5,00,000 will be applicable to government employees only. Thus in the case of a government employee, interest on employees’ contribution to GPF up to Rs. 5,00,000 in a financial year shall be exempt from tax. Any contribution in excess of Rs. 5,00,000 by a government employee into his GPF account will become taxable in the hands of the employee.
Similarly, in the case of a PPF account, there is no contribution from the employer. In fact, a PPF account is not in the employer-employer relationship model. Therefore, any contribution to a PPF account is not attracted by these amendments. Any person can open a PPF account including a self-employed individual.
Even if an individual who is an employee elsewhere, whether in government service or not, opens a PPF account, this is not because of any employer-employee relationship but the same is opened in his individual capacity. It is not a necessary condition to be an employee before opening a PPF account. A PPF can be held by a minor also. Earlier, HUF was also allowed to hold a PPF account.
Further, there is a limit of annual contribution of Rs. 1,50,000 in a PPF account, hence, the amended provisions proposing a tax on interest on excess deposit in a PPF account will not apply.
This is also clarified by the Finance Minister in the Parliament. In reply to a query on the taxation of interest on PF amount and on the enhanced limit of Rs. 5,00,000, the FM replied “This amount is now being raised to Rs. Five lakh only in those cases where there is no contribution by the employer in that fund. Most often, contribution both from the employee as well as the employer are there. But in cases where there is only contribution made by the employee and there is no contribution from the employer, that amount is raised to Rs. Five lakh.”
Therefore, the intention of the amendment is only to cover employees contribution to a PF account where the employer-employee relationship exists. In the context of section 10(11), this is possible only in the case of a GPF account holder and not in a PPF account. A GPF account can be held only by a government employee, unlike a PPF account.
In the nutshell, the government amendments proposed in clause (11) and clause (12) of section 10 enhances the tax-free limit of employees contribution of Rs. 5,00,000 in a financial year for a government employee only. It does not impact the contribution to a PPF account. The tax-free limit of employees contribution in an EPF account shall remain at Rs. 2,50,000 only. The benefit of the enhanced limit of Rs. 5,00,000 is not extended to private sector employees.
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