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CBDT Notifies Computation of Taxable Interest on Employees PF Contribution

cbdt-notifies-computation-of-taxable-interest-on-employees-pf-contribution

CBDT vide Notification No. 95/2021 in GSR 604(E) dated 31.08.2021 through Income-tax (25th Amendment) Rules, 2021 notified the rules to compute the interest on employees contribution to EPF and other provident funds exceeding Rs. 2,50,000 or Rs. 5,00,000, as the case may be, from FY 2021-22. For this purpose, a new Rule 9D is inserted for prescribing the methodology of computation of interest on the taxable portion of EPF contribution by the employees.


The new Rule 9D is notified for calculation of taxable interest relating to contribution in a provident fund or recognised provident fund which is exceeding threshold limit of Rs. 2.5 lakhs or Rs. 5 lakhs, as the case may be.



Finance Act, 2021 has withdrawn the exemption on interest income earned on Employees’ Provident Fund (EPF) on annual contribution in excess of Rs. 2,50,000. The threshold limit is increased to Rs. 5,00,000 where there is no employers’ contribution to the PF account of the employees.


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, the Finance Act, 2021 has amended the provisions of section 10(11) and section 10(12) of the Income-tax Act, 1961 (“Act”). 


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. 


A new proviso is added to clause (11) of section 10 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 the contribution made by that person exceeding 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 provided by rules


The second proviso further provides that if the contribution by the employee is in a fund in which there is no contribution by the employer of such employee, then the threshold limit is Rs. 5,00,000 per annum compared to Rs. 2,50,000 as stated above.


Clause (11) covers GPF of the government employees and the PPF Account covered by Public Provident Fund Act, 1968. Since in a PPF account, there is no contribution from the employee and is open for every public hence the limit of Rs. 2,50,000 or Rs. 5,00,000 is not applicable to a PPF account.


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


A new proviso is added to clause (12) of section 10 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 the contribution made by that person exceeding 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 provided by rules


The second proviso further provides that if the contribution by the employee is in a fund in which there is no contribution by the employer of such employee, then the threshold limit is Rs. 5,00,000 per annum compared to Rs. 2,50,000 as stated above.


Clause (12) is applicable to EPF under Employees Provident Fund & Miscellaneous Provisions Act 1952. In EPF, it is mandatory to contribute by both the employer and the employee.


Read the full text of Notification no. 95/2021 dated 31.08.2021 on Interest Computation on taxable Employees PF Contribution


MINISTRY OF FINANCE


(Department of Revenue) 


(CENTRAL BOARD OF DIRECT TAXES) 


NOTIFICATION 


New Delhi, the 31st August, 2021 


INCOME-TAX 


G.S.R. 604(E).—In exercise of the powers conferred by the first proviso to clause (11) of section 10 and the first proviso to clause (12) of section 10 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:- 


1. Short title and commencement. - (1) These rules may be called the Income-tax (25th Amendment) Rules, 2021. 


(2) They shall come into force on 1st day of April, 2022.


2. In the Income-tax Rules, 1962, after the rule 9C, the following rule shall be inserted, namely: ‒ 


“9D. Calculation of taxable interest relating to contribution in a provident fund or recognised provided fund, exceeding specified limit.- 


(1)For the purposes of the first and second provisos to clauses (11) and (12) of section 10 , income by way of interest accrued during the previous year which is not exempt from inclusion in the total income of a person under the said clauses (hereinafter in this rule referred to as the taxable interest), shall be computed as the interest accrued during the previous year in the taxable contribution account. 


(2) For the purpose of calculation of taxable interest under sub-rule (1), separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person. 


Explanation: For the purposes of this rule,- 


(a) Non-taxable contribution account shall be the aggregate of the following, namely:- 

(i) closing balance in the account as on 31st day of March 2021; 

(ii) any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous years, which is not included in the taxable contribution account; and 

(iii) interest accrued on sub- clause (i) and sub- clause (ii), 


as reduced by the withdrawal, if any, from such account; 


(b) Taxable contribution account shall be the aggregate of the following, namely:- 

(i) contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit; and 

(ii) interest accrued on sub- clause (i), as reduced by the withdrawal, if any, from such account; and 


(c) The threshold limit shall mean: 

(i) five lakh rupees, if the second proviso to clause (11) or clause (12) of section 10 is applicable; and 

(ii) two lakh and fifty thousand rupees in other cases.”. 


[Notification No. 95/2021/ F. No. 370142/36/2021-TPL] 

NEHA SAHAY, Under Secy. (Tax Policy and Legislation Division) 


Note : The principal rules were published in the Gazette of India, Extraordinary, Part-II, Section-3, Sub-section (ii) vide number S.O. 969(E) dated 26th March, 1962 and were last amended vide notification number G.S.R. 578(E) dated 18th August, 2021.


Download CBDT Notification No. 95/2021 dated 31.08.2021 on Interest Computation on taxable Employees PF Contribution

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