Till FY 2020-21 Interest earned on provident fund balance was earlier fully exempted from tax in the hands of the employee as per Section 10(11) of the Income Tax Act, 1961.
However, vide Finance Act, 2021, said Act was amended to impose a tax on interest earned on contributions made to a provident fund in excess of Rs 2.5 lakhs in a financial year. The threshold of contributions is Rs 5 lakhs per annum for provident funds where there is no contribution made by the employer which happens in case of Government employees.
The Central Board of Direct Taxes (CBDT) has now issued a notification No 95/2021 dated 31st August, 2021 whereby Income-tax (25th Amendment) Rules, 2021 have been notified and new Rule 9D has been inserted in Income Tax Rules.
This Rule is regarding the calculation of taxable interest relating to contribution in a provident fund or recognised provided fund, exceeding specified limit. It has specifically been stated that the new Rule will come into force on 1st day of April, 2022.
For ready reference of our readers the new Rule reproduced as under:
“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.”.
The highlights of the new Rule are as under:
- Two seperate accounts to be maintained within the PF Account namely taxable contribution account and non-taxable contribution account.
- Non taxable contribution account to comprise of PF balance as on 31.03.2021, employee contribution upto Rs 2.50 lakhs / Rs 5 lakhs in 2021-22 and onwards and interest on above as reduced by withdrawal from such account..
- Taxable Contribution shall include employee contribution in excess of Rs 2.50 lakhs / Rs 5 lakhs in FY 2021-22 and onwards and interest accrued thereon as reduced by withdrawal from such account.
- Interest accrued on taxable contribution account will be taxable in hands of employee.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
