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/- |
Author
Ashok R
