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Taxability of income from the Provident Fund contribution

Taxability of income from the Provident Fund contribution

Till now, the provisions of sections 10(11) and 10(12) of the Income Tax Act exempted income received from Provident Fund. However, the amendment introduced in the Finance Act, 2021 came up with the provisions according to which the interest income received from the Provident Fund contribution will now be taxable if the same exceeds the prescribed limit.

The present article briefly covers the amendments introduced in the Finance Act, 2021, and the insertion of new rule 9D in the Income Tax Rules.

Amendment introduced vide the Finance Act 2021-

Section 10(11) and Section 10(12) fully exempted interest accrued on the contribution made by the employee to the ‘Recognized Provident Fund’ and ‘Statutory Provident Fund’.

However, vide the Finance Act, 2021, a proviso is inserted to section 10(11) and section 10(12) of the Income Tax Act. The gist of the amendment taxing the interest income from the Provident Fund is as follows-

  • Interest accrued, during the previous year, under the ‘Recognized Provident Fund’ and ‘Statutory Provident Fund’ extends the exemption limit.
  • Interest relates to the contribution made by the employee.
  • Exemption limit above which interest would be taxable is-
Particulars Exemption limit above which interest income is taxable
When the contribution includes the employer’s contribution INR 2,50,000
When the contribution doesn’t include the employer’s contribution INR 5,00,000
  • The amendment is effective from the Assessment Year 2022-2023 (The previous Year 2021-2022).
  • As per the amendment, the manner of computation of taxable interest would be prescribed later.

Manner of computation of taxable interest on Provident Fund contribution-

Income Tax (25th Amendment) Rules, 2021 is introduced vide notification dated 31st August 2021. The said amendment came up with the new rule 9D which dealt with the manner of calculation of taxable interest. Accordingly, the same will be calculated as under-

  1. Firstly, from the previous year 2021-2022, two separate accounts will be maintained for determining the following types of the contribution made by the person-
  • Taxable contribution; and
  • Non-taxable contribution.
  1. Post determination of taxable and non-taxable contribution, interest accrued in the taxable contribution will be taxed when the interest is above the threshold limit.

Going through the above paras, one will find that the terms ‘taxable contribution’, ‘non-taxable contribution’, and ‘threshold limit’ is important. Explanation to rule 9D explains all three terms. The terms are explained hereunder-

‘Taxable Contribution’ means the total of the following-

  1. A contribution made by the person in the Provident Fund account during the previous year 2021-2022 and subsequent previous years over the threshold limit; and
  2. Interest accrued on the contribution stated above.

‘Non-taxable Contribution’ means a total of the following-

  1. The closing balance of the Provident Fund account as of 31st March 2021;
  2. A contribution made by the person in the Provident Fund account, which is not included in the taxable contribution, during the previous year 2021-2022 and subsequent previous years; and
  3. Interest accrued as per the above contribution.

‘Threshold limit’ means as under-

  1. INR 5 Lakhs – when the contribution in the Provident Fund account doesn’t include the employer contribution.
  2. INR 2.50 Lakhs – in any other case.