Taxability of Interest on Recognized Provident Fund
The finance act 2021 has introduced an amendment with respect to taxability of interest on employee’s contribution to recognized provident fund with effective from financial year 2021-2022.
Points to be noted under Recognized Provident Fund:
- Employees Contribution towards PF is allowed to be deducted u/s 80C
- Employers Contribution towards PF is allowed to be claimed as deduction up to 12% of Salary (Where Salary = Basic Pay + DA (in terms) + Sales Commission)
- Lump sum amount received on withdrawal from PF is exempt from tax (subject to 5year service condition.
Interest On Recognized Provident Fund:
Interest on Recognized Provident Fund is exempt from tax subject to a maximum of 9.5% per annum.
However as per Finance Act, 2021 Interest on Recognized Provident Fund on Employee’s Contribution is exempt only on contribution up to Rs.2,50,000/- (per annum).
| Period | Maximum Allowed Interest* | Maximum Employee’s Contribution for Exempt Interest Calculation |
| Up to 31.03.2021 | 9.5% PA | Any amount of Employee’s Contribution |
| From 01.04.2021 | 9.5% PA | Rs.2,50,000/- PA |
*The maximum interest rate that can be claimed as deduction if actual interest rate is more than 9.5% per annum.
CASE STUDY:
CASE I: Mr. Sundar is a salaried employee contributing Rs. 20,000/- per month as employee contribution towards recognized provident fund for the FY2021-22.
In this case Mr. Sundar is contribution Rs. 20,000/- per month giving Rs.2,40,000/- as per annum employee contribution towards recognized provident fund. Hence, Interest earned on this contribution (subject to maximum interest rate of 9.5% pa) is exempt under Income Tax.
CASE ll: Mr. Satya Nadella is a salaried employee contributing Rs. 25,000/- per month as employee contribution towards recognized provident fund for the FY2021-22.
In this case Mr. Satya Nadella is contributing Rs.3,00,000/- per annum as an employee contribution which is higher than the specified limit of Rs.2,50,000/-. Hence, the taxable and non-taxable portion of interest on employee’s contribution is Rs. 50,000/- (Rs.3L less Rs.2.5L)
Taxable and Non-Taxable Portion of Interest (FY 2021-2022)
| Month End Contribution | Employee’s Contribution | Interest for the full year* | Non-Taxable Interest | Taxable Interest |
| April’21 | 25,000 | 1,856.25 | 1,856.25 | – |
| May’21 | 25,000 | 1,687.50 | 1,687.50 | – |
| June’21 | 25,000 | 1,518.75 | 1,518.75 | – |
| July’21 | 25,000 | 1,350.00 | 1,350.00 | – |
| August’21 | 25,000 | 1,181.25 | 1,181.25 | – |
| September’21 | 25,000 | 1,012.50 | 1,012.50 | – |
| October’21 | 25,000 | 843.75 | 843.75 | – |
| November’21 | 25,000 | 675.00 | 675.00 | – |
| December’21 | 25,000 | 506.25 | 506.25 | – |
| January’22 | 25,000 | 337.50 | 337.50 | – |
| February’22 | 25,000 | 168.75 | – | 168.75 |
| March’22 | 25,000 | – | – | – |
*The ratified interest rate for the FY2021-22 is 8.1% by the Government. Hence, the above workings are computed based on the rate of 8.1%.
Rule 9D (Segregation of PF Account balance into Taxable and Non-Taxable)
| Taxable Portion | Non-Taxable Portion |
| Closing balance in PF account as on 31.03.2021. | |
| (a) Contribution made in PY 2021-22 and Subsequent Years which is in excess of Rs.2,50,000/- | Contribution made in any PY which is in limit of Rs.2,50,000/- |
| Interest Accrued on (i) | Interest Accrued on (i) and (ii) |
| As reduced by any withdrawals. | As reduced by any withdrawals. |
Hence, Taxable Portion of PF of Mr. Satya Nadella for the FY 2021-2022 will be:
| Particulars | Taxable Portion of Contribution |
| Opening Balance as on 31.03.2021 | – |
| Contribution during the year | Rs.50,000/- |
| Interest on PF | Rs.168.75/- |
| Closing Balance as on 31.03.2022 | Rs.50,168.75/- |
CASE III: In continuation of CASE II, Mr. Satya Nadella is contributing Rs. 35,000/- as employee contribution in the FY 2022-23.
Taxable and Non-Taxable Portion of Interest (FY 2022-2023)
| Month End Contribution | Employee’s Contribution | Interest for the full year | Non-Taxable Interest | Taxable Interest |
| April’21 | 35,000 | 2,598.75 | 2,598.75 | |
| May’21 | 35,000 | 2,362.50 | 2,362.50 | |
| June’21 | 35,000 | 2,126.25 | 2,126.25 | |
| July’21 | 35,000 | 1,890.00 | 1,890.00 | |
| August’21 | 35,000 | 1,653.75 | 1,653.75 | |
| September’21 | 35,000 | 1,417.50 | 1,417.50 | |
| October’21 | 35,000 | 1,181.25 | 1,181.25 | |
| November’21 | 35,000 | 945.00 | 810.00 | 135.00 |
| December’21 | 35,000 | 708.75 | – | 708.75 |
| January’22 | 35,000 | 472.50 | – | 472.50 |
| February’22 | 35,000 | 236.25 | – | 236.25 |
| March’22 | 35,000 | – | – | – |
| Total | 15,592.50 | 14,040.00 | 1,552.50 |
Taxable Portion of PF of Mr. Satya Nadella for the FY 2022-2023 will be:
| Particulars | Taxable Portion of Contribution |
| Opening Balance as on 31.03.2022 | Rs.50,168.75/- |
| Interest on Opening Balance | Rs.4,063.67/- |
| Contribution during the year (excess of 2.5L) | Rs.1,70,000/- |
| Interest on PF (on excess contribution) | Rs.1,552.50/- |
| Closing Balance as on 31.03.2023 | Rs.225,784.92/- |
Also Check: Taxability Of Interest on Recognized Provident Fund
Author
Ashok R
