CBDT Announces Rules For Calculating Interest On PF Contributions Exceeding Specified Limit

According to the highlights of Budget 2021, it is proposed to limit tax exemption for interest income earned on employees' contributions to different provident funds to a yearly contribution of Rs 2.5 lakh in order to rationalise tax exemption for employees with higher income levels. This limitation will only apply to contributions made on or after April 1, 2021. Resulting to the same the Central Board of Direct Taxes (CBDT) has announced the Income-tax (25th Amendment) Rules, 2021. These rules shall come into force on the 1st day of April, 2022. In the Income-tax Rules, 1962, after the rule 9C, the following rule shall be inserted, namely:-

According to the statement released by CBDT on 31st August 2021 "Calculation of taxable interest relating to contribution in a provident fund or recognised provident fund, exceeding the 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."

CBDT has also said that "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."

As a result, you will have to pay tax on the interest collected on surplus contributions in FY 2021-22, and you will have to disclose it in your income tax return in the subsequent years. Private sector employees are exempt from the Rs 2.5 lakh limit. The relevant threshold for government workers is Rs 5 lakh, which means that if contributions to EPF and VPF surpass Rs 5 lakh in a fiscal year, interest earned will be subject to taxation to them. To make it easier for the taxpayer to calculate, the two PF accounts will keep track of taxable and non-taxable contributions simultaneously.

According to the notification, the non-taxable account will comprise the total amount of your PF account on March 31, 2021, contributions made within the specified threshold in 2021-22 and subsequent years, and interest earned. According to the announcement, the regulation will take effect in the fiscal year 2021-22, thus contributions made before March 31, 2021 are tax-free.

For the purposes of this rule, CBDT has explained on its notification that:

(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.