As of now, interest earned on provident fund balance is completely exempted from tax in the hands of the employee. However, in Budget 2021, the Finance Minister Nirmala Sitharaman had proposed taxability of interest on several provident funds, exactly where the specified limit exceeds. The government has issued a notification relating to the calculation of taxable interest relating to contribution in a provident fund or recognised offered fund, exceeding specified limit. The Income-tax (25th Amendment) Rules, 2021 will come into force on 1st day of April, 2022.
“CBDT has been pro-active in providing necessary clarifications through its notifications and circulars to ensure that the tax payers have requisite guidance and certainty on the tax treatment to be accorded to the components of their income. The circular of the CBDT dated 31st August, 2021, is one such step which provides clarity on a very important aspects which concerns the salaried employees who contribute towards provident fund schemes. The circular will provide much needed clarity as to how the interest component which gets accrued on such contribution shall be computed and as to how the contributions shall be segregated for computation of taxable interest,” says Ritesh Kumar S, Partner, IndusLaw.
The new rule is that the interest earned on an employee’s contribution above Rs 2.5 lakh in a year will turn out to be taxable in the hands of the employee whilst for the government sector workers, the monetary ceiling shall be Rs 5 lakh.
In the Income-tax Rules, 1962, just after the rule 9C, the following rule (9D) has been inserted by the Central Board of Direct Taxes:
(1) For the purposes of the initial and second provisos to clauses (11) and (12) of section 10 , revenue by way of interest accrued throughout the prior year which is not exempt from inclusion in the total revenue of a particular person beneath the stated clauses (hereinafter in this rule referred to as the taxable interest), shall be computed as the interest accrued throughout the prior year in the taxable contribution account.
(2) For the goal of calculation of taxable interest beneath sub-rule (1), separate accounts inside the provident fund account shall be maintained throughout the prior year 2021-2022 and all subsequent prior years for taxable contribution and non-taxable contribution made by a particular person.
To know tax on PF interest in Budget 2021 instance, right here is the calculator course of action.
How to calculate
(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 particular person in the account throughout the prior year 2021-2022 and subsequent prior years, which is not integrated in the taxable contribution account and
(iii) interest accrued on sub- clause (i) and sub- clause (ii), as lowered 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 particular person in a prior year in the account throughout the prior year 2021-2022 and subsequent prior years, which is in excess of the threshold limit and
(ii) interest accrued on sub- clause (i), as lowered by the withdrawal, if any, from such account and
(c) The threshold limit shall imply:
(i) 5 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 instances.”