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Taxability of Interest on Employees Contribution to Provident Fund (PF)

taxability-of-interest-on-employees-contribution-to-provident-fund-pf


Finance Bill, 2021 has proposed to withdraw the income-tax exemption available on Interest on Employees Contribution to Employees Provident Fund (EPF) under certain circumstances. The proposed amendment has restricted the tax exemption on the interest income on the aggregate of amounts of the contribution made by the employee above Rs. 2,50,000 in the previous year in a recognized provident fund (PF). These amendments introducing a tax on interest on PF contribution are subject to certain issues which are discussed in detail in this article. The amendment not only covers EPF but also GPF in which government employees contribute their PF contribution. Taxing interest on EPF contributions beyond Rs. 2.5 Lakh is one of the key amendments in the Union Budget 2021-22.


    Rationalisation  of  Tax- free Income on Provident Funds


    Finance Minister Smt. Nirmala Sitharaman announced in the Budget speech while presenting the Union Budget 2021 that from April 1, 2021, interest on employee contributions to the provident fund in excess of Rs. 2.5 Lakh per annum would be taxed.


    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, the Budget Speech reveals.


    Last year vide Finance Act, 2020 the government has provided for the withdrawal of tax exemption and treated the employer's contribution to an account of a recognized provident fund, National Pension Scheme (NPS) and superannuation fund of the employee concerned in excess of Rs. 7,50,000 in aggregate for all the three funds in a year is made as taxable income under the head ‘Income from salary’. Such an excess amount of the employer’s contribution shall be treated as perquisites u/s 17(2)(vii). 



    This year Budget 2021 has not changed the income-tax rates but has brought to tax the interest earned on PF contribution by the high salary earners. However, interest on employees’ contribution to PF shall remain tax-exempt till the total amount of contribution in a financial year does not exceed Rs. 2,50,000. The ceiling of employee’s contribution to PF of Rs. 2,50,000 per annum indicates that the basic salary (including DA if any) shall be at least Rs. 1,74,000 per month so as to qualify for paying tax on interest income. Thus, an employee whose basic salary including dearness allowance (DA), if any, exceeds Rs. 1,74,000/- per month shall be subject to payment of tax on the interest amount which he earns on his contribution to PF above Rs. 2,50,000 in a financial year. For contribution up to Rs. 250,000, there will be no tax implication and the interest earned on annual PF contribution up to Rs. 2,50,000 shall remain tax-free.


    Note: As per EPF Rules, the rate of an employee’s contribution to PF is 12% of his basic salary and DA. Unlike, EPF, there is no minimum threshold defined for GPF.


    Provident Fund is a retirement-cum-savings scheme. Apart from unrecognized provident funds, all other funds are eligible for significant tax benefits, which is why provident fund contributions are one of the most popular forms of retirement savings.


    Provident Funds require contributions from both employees and employers and enable the employee to get a lump sum amount of corpus at the time of retirement. Provident Fund is a saving instrument where one gets tax exemption at the time of contribution (deduction u/s 80C), then on the accumulation (interest is exempt) and, finally, at the time of withdrawal. This is called EEE (Exempt-Exempt-Exempt) mechanism.


    What is the position of tax on interest on PF contribution before the amendment?


    Under the existing provisions of the Income-tax Act, tax treatment for the Provident Fund is Exempt, Exempt and Exempt (EEE) i.e., the monthly/periodic contributions are allowed as a deduction from income for tax purposes; the returns generated on these contributions during the accumulation phase are also exempt from tax; and also the terminal benefits on exit are not taxable in the hands of the individual employee. 


    One should bear in mind that the proposed amendment by Finance Bill 2021 does not tax the employees’ contribution to PF but intends to tax the interest on PF contribution by the employee himself/herself and that too.


    This isn't the first time that the government has proposed to tax PF money. The Finance Bill, 2016 had proposed that the contribution of 60% of the EPF be taxed on withdrawal. The proposal was then rolled back after a massive outcry against the new levy.


    However, this amendment may not face such a big backlash because it affects only the creamy layer of salaried employees.


    Presently, the income-tax provisions governing the contribution to employees provident fund (EPF) and interest thereon for different types of provident funds are discussed below.


    Types of Provident Funds


    For the purposes of Income Tax, provident funds are categorized into:


    1. Recognised Provident Fund (RPF) – is a fund which is recognized by the Commissioner of Income Tax (CIT). The provident fund scheme of the EPFO to which the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 applies is a Recognised Provident Fund under the Income Tax Act, 1961. 


    If the employer manages the provident scheme by creating its own PF Trust, the same needs to be recognized by the CIT. 


    If the same is recognized by the CIT, such private PF Trust of the employer shall be considered as RPF under the Income Tax Act. If the same is not recognized by the CIT, such PF shall be considered as an Unrecognized Provident Fund under the Income Tax Act, 1961.


    Section 2(38) defines "recognised provident fund" to mean a provident fund which has been and continues to be recognised by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part A of the Fourth Schedule and includes a provident fund established under a scheme framed under the Employees' Provident Funds Act, 1952 (19 of 1952).


    2. Unrecognised Provident Fund (URPF) – is a fund that is not recognized by the Commissioner of Income Tax.


    3. Statutory Provident Fund (SPF) – This fund is established under the Provident Fund Act, 1925. This is mainly for government employees, universities, educational institutions, etc.


    4. Public Provident Fund (PPF) – is entirely different from the above funds which are employee-focused provident funds. PPF is established under the Public Provident Fund Act, 1968 and can be opened and operated by any individual including self-employed persons.


    Provident Funds in India were introduced during the British regime to provide retirement benefits to employees in regular wage employment.


    The first legislation in this regard is the Provident Funds Act 1925, enacted for the creation and governance of PFs but was limited in scope.


    It was only in 1951 that the Union government brought a separate Act for the collection of PFs for employees of specific private industries. The Employees Provident Fund & Miscellaneous Provisions Act 1952 came into effect on 4 March 1952 to cover various industries under its purview.


    Taxability of Interest on various funds where 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. 


    Note: Public Provident Fund Scheme, 1968 (PPF) has been notified under this clause.


    Similarly, Clause (12) of section 10 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.


    Part A of the Fourth Schedule of the Income Tax Act, 1961 deals with Recognized Provident Fund. Rule 1 of this Part specifically excludes the operation of the provisions of this Part on the Provident Fund Act, 1925.


    Presently, the rate of interest on EPF is 8.5 per cent per annum. The contribution towards EPF is 12 per cent of the basic salary and DA if any. However, rules allow a person to increase the contribution up to 100 per cent of the basic salary. Any such additional contribution over and above the statutory requirement is known as the Voluntary Provident Fund (VPF).


    Presently, the taxability of contribution in a recognized provident fund are discussed below-


    Employers’ contribution to RPF: If the employers’ contribution to PF exceeds 12% of the salary of the employee, then contribution in excess of such 12% shall be taxable in the hands of the employee under the head ‘Income from salary’. However, from FY 2021-22, if the aggregate contribution by the employer exceeds Rs. 7,50,000 in a year, such excess amount of employers’ contributions as well as interest thereon is taxable as ‘perquisite’ u/s 17(2).


    Interest on PF: Any amount of interest in excess of the rate of interest fixed and notified by the government in the PF account is exempt. The present rate of interest is 8.5%.


    [Section 17(1) and Rule 6 of Fourth Schedule, Part A]


    Employees Contribution to RPF: The amount of employees’ contribution to PF is eligible for deduction from the computation of total income of the concerned employee under section 80C.


    Contribution to PF account


    In a PF account of an employee, both the employer as well as employee makes a contribution. 


    The entire contribution of the employee is invested in the PF account. However, in the case of employers' contribution to the PF account of the employee, 8.33% of the employers’ contribution is invested in the Employee Pension Scheme (EPS) account and the remaining 3.67% of the contribution amount is credited to the PF account of the employee.


    Why the amendment to tax interest on employees contribution to PF is introduced


    The Memorandum to the Finance Bill, 2021 explains that instances have come to the notice where some employees are contributing huge amounts to these funds and the entire interest accrued or 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. 


    The government has also shared certain statistics to justify the amendment and the proposal to bring to tax on interest on excess contribution to PF by the employees. 


    As per certain media reports, the top 20 HNIs have about Rs 825 crore in their PF accounts while the top 100 have contributed above Rs 2000 crore in PF accounts. This works out to be an average corpus of Rs 5.9 crore per person in the HNI category, which yields an interest income of Rs 50.3 lakh per account annually. 


    It is further reported that out of 4.5 crore EFP accounts, just over 0.27% (around 1.23 lakh) contributors are misusing the provision. Many of these accounts witness deposits in several crores of money every month with the highest account balance being Rs 103 crore followed by two accounts of Rs 86 crore each.


    Expenditure Secretary TV Somanathan in an interview said that the government is antagonising 1.22 lakh people whose income is more than Rs. 2 lakh a month which is just 0.25 per cent of all subscribers. He further stated that the levy will generate a reasonable amount of resources for the government which, going forward, will become substantial in the next few years.


    He also made it clear that though there is no minimum threshold defined for GPF, like 12 per cent of wages under the EPF, still the government is not very comfortable with the concept of a ‘special bracket for babus.’


    In many cases, some employees even contribute their 100% salary into the PF account to earn a handsome tax-free return.


    What's the amendment proposed for bringing interest on employees contribution to PF


    Accordingly, it is proposed to insert a 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 the 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.


    For this purpose, amendments have been proposed in section 10(11) and section 10(12) to withdraw the exemption on interest on employees contribution to RPF above Rs. 2,50,000 vide clause 5 of the Finance Bill, 2021 as stated below-


    Amendment of Section 10.


    5. In section 10 of the Income-tax Act,–


    (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;”;


    Amended Provisions explained


    Clause (11) of the said section 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. 


    How the interest on the taxable amount of PF contribution will be computed


    The newly inserted proviso to section 10(11) states that the interest accrued during the previous year in the PF account of the employee shall be computed in the prescribed manner. Thus, the method of computing interest will be announced by the government.


    Hence, the law has itself not provided any mechanism to compute the taxable portion of interest on the PF account. The government will clarify the same separately.


    However, it should be noted that the proviso shall apply only on the amount or the aggregate of amounts of the contribution made by the employee in excess of Rs. 2,50,000 in any previous year in his PF account. In other words, only the interest on such excess deposit of PF amount by the employee will not be exempt from tax and hence is taxable.


    In the PF account both the contribution of the employer and employee is shown separately and so the interest thereon. As per accounting practices, when there is no separation or segregation of the amount of employees share upto Rs. 2.50 Lakh and above Rs. 2.50 Lakh, the only method to segregate the common amount is on a proportionate basis.


    The total amount of interest will be required to be proportioned in the ratio of the excess contribution of the employee to the amount of total contribution of the employee.


    However, government officials while giving the details about the proposed accounting system said that GPF and EPF contribution into an account above Rs. 2.5 lakh will be directed to a separate sub-account. The primary account with a past balance as on March 31, 2021, will always remain tax-free. The excess flow will go into a secondary bucket which is like a taxable deposit and the interest thereon is taxable. Statements received from EPFO or GPF will reveal the taxable portion of the interest.


    Thus the government will provide the facility and the taxpayers need not be worried about the taxable portion of interest income.


    Whether tax on PF interest also covers a contribution to PPF account


    On a plain reading of the amended provisions, it appears that tax will apply to the interest earned on contributions made to Employees' Provident Fund, Statutory Provident Fund as well as Public Provident Fund (PPF).


    Finance Bill, 2021 has amended both sections 10(11) and 10(12) of the Act. Section 10(11) deals with the statutory provident fund or GPF as well as PPF while section 10(12) deals with EPF only.


    However, the wordings of the proviso under clause (11) suggest that the excess contribution to GPF and PPF is required to be reckoned separately and shall not be combined or aggregated. This is because the proviso uses the words ‘in that fund’ which indicates that the exemption is withdrawn for each fund separately instead of ‘in those funds’ or alike language; since clause (11) covers two funds.


    Further, the Budget speech, as well as the Memorandum, suggest that the legislature has only the intention to cover the employees' contribution into the PF account and not the PPF account.  The exemption has been removed for EPF (Employee Provident Fund) and GPF (General Provident Fund) only.


    Nevertheless, there is already a limit of Rs. 1.5 lakh contribution in a year to a PPF account and hence the restriction is not applicable on a deposit into PPF account. Further, unless PPF rules are changed to allow contributions of more than Rs. 2.5 Lakh a year to a PPF account, the amendment to Section 10(11) will not have any impact.


    However, it is better, if the government clarifies the matter or makes an appropriate amendment to this effect in the Act itself.


    Illustration:


    Mr Rakesh a government employee contributes Rs. 6 Lakh in his GPF account for the FY 2021-22. In the same financial year, he contributes Rs. 1.50 Lakh in his PPF account. 


    In this case, interest on the excess contribution of Rs. 3.50 Lakh (Rs. 6.0 Lakh - Rs. 2.50 Lakh) into his GPF account will only be considered for taxation.


    The contribution of Rs. 1.50 Lakh shall not be aggregated with the contribution of Rs. 6.0 Lakh. Deposits in both the funds are independent though covered in section 10(11).


    Whether Interest earned annually from the excess contribution of Rs. 2.5 lakh to EPF/GPF is taxed retrospectively


    The Budget Speech states that the exemption on interest on PF will be withdrawn only for the contribution made on or after 01.04.2021. However, the wordings of the proviso under clauses (11) and (12) does not suggest so.


    The proviso states that the provisions of this clause shall not apply to the interest income accrued during the previous year in the employees' PF account to the extent it relates to the amount or the aggregate of amounts of the contribution made by that person in excess of Rs. 2,50,000  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.


    The plain reading of the above provision indicates that-


    1. Interest credited on or after 1st April, 2021 is not exempt from tax.


    2. Though such exemption is not available from 01.04.2021 but it unintentionally covers the contribution made in the PF account in excess of Rs. 250000 in any previous year which invariably means preceding previous years.


    3. In respect of contribution, no condition is imposed that the excess contribution shall also be made on or after 01.04.2021 in line of legislative intent.


    Even though the expression ‘in any previous year' is used, since the amendments in clause (11) and clause (12) shall take effect only from AY 2022-23, it shall refer to any previous year only from FY 2021-22 and not preceding previous years.


    Hence, it is imperative for the government to clarify the position or make suitable amendments in the law to clear the doubts over the retrospective applicability of the amendment.


    In this context, it should be noted that Expenditure Secretary TV Somanathan, while speaking at a BusinessLine webinar on ‘Decoding the Budget 2021-22, has clarified that interest of more than Rs. 2.5 lakh earned annually from contribution to Employees Provident Fund (EPF) or Government Provident Fund (GPF) will not be taxed retrospectively.


    He further said, “There is no intention to retrospectively tax. If anybody thinks the wording of the Finance Bill has any loophole that could be interpreted as a retrospective, please send it to us, we will correct it.” 


    Hence, it is clear that the intention of the government is not to tax the interest on past contributions to PF account in excess of Rs. 2,50,000.


    Previous Year and head of income in which the interest on PF account will be taxed


    Presently, interest on PF account is exempt in its entirety if the same is earned during employment. 


    Interest earned before retirement will not get taxed irrespective of when it is withdrawn after retirement, but any interest earned post-retirement will be taxable in the hands of the account holder. This is because the exemption for interest on EPF accumulated balance is available only to an employee. Once an individual leaves their job or retires, he or she does not remain an employee; hence, any interest earned attracts tax. [ACIT vs. Dileep Ranjekar in ITA No. 858/Bang./2016]


    The proposed amendments in law have only withdrawn the exemption available to interest on PF account if the employees’ contribution therein exceeds Rs. 2.50 Lakh in a year. In other words, the interest earned on such excess contributions of PF amount will be subject to tax.


    However, it is not made clear when the interest will be taxed. In other words, the amendment is silent with regard to the previous year in which the interest income will be chargeable to tax. 


    Will it be charged to tax in the previous year in which it is credited in the PF account or in the year of withdrawal of such accumulated balance or after the cessation of employment-needs to be clarified.


    Further, it is also not clear under which heads of income the interest on PF will be taxed during employment and after employment. Will it be chargeable under the head ‘Income from Salary’ or ‘Income from other Sources'. Post Budget, government officials have clarified that interest income from provident fund contributions over Rs 2.5 lakh will be taxed like fixed deposit interest. If this is so then the interest accrued and credited in the PF account over Rs. 2,50,000 contribution shall be taxed under the head ‘income from other sources’ whether such interest is earned during the employment or after the employment.


    Whether the tax on PF interest will impact all the employees


    The proposed amendment has made it crystal clear that this amendment related to tax the interest on PF account shall not apply to all the employees. Rather it will apply only to high salary earners. The amended provisions specify that-


    The provisions taxing the interest on PF account shall apply only on the employees’ contribution in his PF account,


    Such employees’ contribution in his PF account must exceed Rs. 2,50,000 in a financial year.


    It implies that in the case of EPF account holders (those who are in private sector jobs) the monthly basic salary including DA, in any, must be at least Rs. 1,74,000 to come within the purview of the taxation regime.


    Those who are earning less than Rs. 1,74,000 are not impacted in any manner by the proposed amendments. However, it should be noted that those who earn low salaries but choose to invest a significantly higher proportion in their PF account through Voluntary Provident Fund (VPF ) will also be hit by the amendment tax on PF interest provisions.


    Whether the tax on PF Interest is subject to TDS provisions


    Presently, there is no express provision in the Income Tax Act, 1961 which requires deduction of tax on the interest income on PF account. Rather, no such changes in the TDS provisions are proposed in the Finance Bill, 2021.


    However, there is section 194A in the Income Tax Act, 1961 which requires a person to deduct tax from the payment of interest other than interest on securities.


    Post Budget, government officials have clarified that interest income from provident fund contributions over Rs 2.5 lakh will be taxed like fixed deposit interest. If this is so then the interest accrued and credited in the PF account over Rs. 2,50,000 contribution shall be subject to TDS under section 194A of the Act with the applicable threshold limit of Rs. 5,000.


    The rate of TDS on interest income under section 194A is 10%. It is reduced to 7.5% till 31.03.2021.


    The procedure would be more clear once the rules are prescribed by the government.


    Impact of New Code on Wages, 2019 on PF contribution and tax on interest


    As per the Code on Wages, 2019 the basic should be at least 50% of the total remuneration payable to an employee. Presently there is no uniformity in the amount of basic salary and it varies from organization to organization. Though the rate of mandatory PF contribution remains the same at 12% of the basic salary, however, due to the increase in the amount of basic salary, an employee, who is presently out of the tax purview, may feel the tax pinch.


    The new Labour Code defines the term "wages" to mean all remuneration payable to the employee including basic pay and DA. It excludes statutory bonus, the value of house-accommodation, employers’ contribution to PF and interest thereon, conveyance allowance, house rent allowance, etc.


    It is further provided that the excluded components cannot exceed 50% of the total remuneration. If it exceeds the threshold of 50%, such excess amount shall be construed as ‘wages’. 


    This expands the scope of the term 'wages' for the purpose of contribution to EPF and thereby increases the amount of PF contribution.


    Remember, the limit of Rs. 2,50,000 shall apply even if the same is within the mandatory legal requirement of 12% contribution.


    Tax implication on interest on interest from excess PF contribution


    The proposed amendments are not clear on this aspect. The issue is whether there will be a tax on the interest amount on the interest income that is earned on excess deposit of PF contribution. In other words, whether interest-on-interest is taxed?


    The excess PF contribution over Rs. 2,50,000 is proposed to be kept separately and interest will be credited in the separate basket of the amount in one financial year. Next year, interest will be credited on the amount of previous years’ contribution and interest plus the current year’s contribution. Hence, in the next year, interest on interest is also credited.


    The question is whether the interest-on-interest on excess PF contribution is also subject to taxation.


    The interest credited on the PF account is reinvested in the PF account and hence it gets accumulated. This is known as a cumulative investment scheme where interest on interest is also earned.


    One view is that the proposed amendment has only withdrawn the exemption of interest on excess contribution in PF account over Rs. 2,50,000 in a year. There is no express provision in the law that has withdrawn the exemption of interest on interest income on such excess contribution amount.


    Another view is that once the interest on excess PF contribution over Rs. 2,50,000 is taxed in one financial year it will remain taxable even in future years.


    It is illustrated below, assuming a rate of interest is 8%-


    Particulars

    Employee Contribution up to Rs. 250000

    Employee Contribution above Rs. 250000

    Contribution for FY 2020-21

    300000

    NA

    Interest for FY 2020-21

    24000

    NA

    Contribution for FY 2021-22

    250000

    50000

    Interest for FY 2021-22

    45920

    4000

    Contribution for FY 2022-23

    270000

    70000

    Interest for FY 2022-23

    71194

    9920*

     

    *Here lies the confusion. If the cumulative approach is considered, the interest income for FY 2022-23 comes to Rs. 9,920/-. This includes interest on interest income of Rs. 4,000 for the FY 2021-22. However, if only the principal amount is considered for taxability then the interest comes to Rs. 9,620/- for the FY 2022-23 instead of Rs. 9,920/-. Thus there is a difference of Rs. 320 which is nothing but interest on the interest of Rs. 4,000/- @ 8%.


    The wordings of the proviso to section 10(11)/(12) being “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 the contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund” suggest that only the interest income accrued during the previous year on such excess contribution is subject to tax. There will be no tax on interest on this interest income which is earned in the preceding year.


    On the other hand, as stated earlier, government officials have stated in interviews that the interest on such excess contribution of PF will be taxed as per bank fixed deposits where interest on interest is also subject to tax. 


    One needs to wait for the rules to be notified in this regard to clear the doubts.


    What if in a previous year contribution exceeds Rs. 250000 but not in the next year


    Continuing the above table, if there is no contribution in the PF account in FY 2023-24 or the amount of contribution is less than Rs. 2,50,000, then whether the interest on such PF will be taxed in FY 2023-24.


    Particulars

    Employee Contribution up to Rs. 250000

    Employee Contribution above Rs. 250000

    Contribution for FY 2020-21

    300000


    Interest for FY 2020-21

    24000


    Contribution for FY 2021-22

    250000

    50000

    Interest for FY 2021-22

    45920

    4000

    Contribution for FY 2022-23

    270000

    70000

    Interest for FY 2022-23

    71194

    9920

    Contribution for FY 2023-24

    Nil

    (or say Rs. 2,00,000)

    Nil

    Interest for FY 2023-24

    76890

    10714**


    ** The issue is whether the interest of Rs. 10,714/- will be taxed in the FY 2023-24 when there is no contribution in excess of Rs. 2,50,000. The answer lies in the positive. The interest of Rs. 10,714/- (subject to the clarification on interest on interest as discussed above)  will be taxable in the FY 2023-24 even if there is no contribution over Rs. 2,50,000/-.


    This is because the amended provision uses the expression ‘in any previous year in that fund’ which signifies that where there is a contribution in a PF account in excess of Rs. 2,50,000/- in any previous year, the interest thereon will continue to be taxed forever whether or not there is any contribution in a particular financial year.


    Key Points of the proposed Amendments on Taxability of Interest on Employees Contribution to Provident Fund (PF)


    1. The amendment covers only employees' contribution to EPF/GPF. It does not cover employers’ contribution to the PF account.

     

    2. The interest income from the employees' contribution to his PF account in excess of Rs. 2,50,000 in a financial year is only taxable. Interest on employees’ contribution upto Rs. 2,50,000 continues to remain exempt from tax even if the contribution amount exceeds Rs. 2,50,000. Where the contribution amount exceeds Rs. 2,50,000 then interest on such excess amount will be taxable. 

     

    3. In the case of EPF, mandatory as well as a voluntary amount of contribution is considered for calculating the limit of Rs. 2,50,000.

     

    4. Interest of more than Rs. 2,50,000 earned annually from contribution to Provident Fund account will not be taxed retrospectively. If employees’ contribution to provident fund on or after 1 April 2021 exceeds Rs. 2,50,000 in any year, interest earned on contribution over Rs. 2,50,000 shall be taxable.

     

    5. The limit of Rs. 2,50,000/- shall apply even if the same is within the mandatory statutory requirement of 12% contribution.

     

    6. This tax on PF interest is applicable only for the employees’ contribution to PF made on or after April 1, 2021. There is no intention to tax it retrospectively, Thus contributions made upto 31st March 2021 even in excess of Rs. 2,50,000 in PF account will not be subject to tax. 

     

    7. Even though the withdrawal of tax benefits on PF covers PPF accounts, it is going to impact PPF contribution since the contribution to PPF is already restricted to Rs. 1,50,000 in a financial year presently.




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