The government has issued a notification regarding the calculation of taxable interest relating to contribution in a provident fund or recognised provided fund, exceeding specified limit.
As of now, interest earned on provident fund balance is fully exempted from tax in the hands of the employee. However, in Budget 2021, the Finance Minister Nirmala Sitharaman had proposed taxability of interest on various provident funds, where the specified limit exceeds. The government has issued a notification regarding the calculation of taxable interest relating to contribution in a provident fund or recognised provided fund, exceeding specified limit. The Income-tax (25th Amendment) Rules, 2021 will come into force on 1st day of April, 2022.
“CBDT has been pro-active in providing necessary clarifications through its notifications and circulars to ensure that the tax payers have requisite guidance and certainty on the tax treatment to be accorded to the components of their income. The circular of the CBDT dated 31st August, 2021, is one such step which provides clarity on a very important aspects which concerns the salaried employees who contribute towards provident fund schemes. The circular will provide much needed clarity as to how the interest component which gets accrued on such contribution shall be computed and as to how the contributions shall be segregated for computation of taxable interest,” says Ritesh Kumar S, Partner, IndusLaw.
The new rule is that the interest earned on an employee’s contribution above Rs 2.5 lakh in a year will become taxable in the hands of the employee while for the government sector employees, the monetary ceiling shall be Rs 5 lakh.
In the Income-tax Rules, 1962, after the rule 9C, the following rule (9D) has been inserted by the Central Board of Direct Taxes:
(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.
To know tax on PF interest in Budget 2021 example, here is the calculator process.
How to calculate
(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.”