Ultimate Guide to Taxable PF Contribution and Interest with Calculator as per FA 2021

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The taxation of interest on PF contribution ( provident fund contributions) is currently a tot topic. Why? Because many people (read employees) will have to pay tax on interest earned during FY 2021-22 on EPF or GPF or recognised PF. This is on account of a new law inserted proviso to sections 10(11) and section 10(12) of the Income Tax Act vide Finance Act 2021 that took away exemption of interest on the contribution to PF exceeding Rs 5 lakh made after 1st April 2021.

So, for those subscribers to the PF scheme where both employers and employees contribute, the interest earned on an employee’s contribution exceeding Rs 2.5 Lakh is taxable and for all others, interest earned on contribution exceeding Rs 5 Lakhs is taxable.

Rule for Computation of Taxable PF Contribution & Interest

So, how will the taxable amount of contribution and the taxable amount of interest be computed? CBDT has notified Rule 9D via Notification No. 95/2021– Dated:  31st August 2021. The rule says as under :

Taxable ContributionNon Taxable Contribution computation
(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 -Rs 2,50,000 in case of EPF, RF or Rs 5,00,000
(ii) interest accrued on the taxable contribution
(i) Closing balance in the account as of the 31st day of March 2021
Add : (ii) any contribution made by the person in the account during the previous year 2021-2022 up to Rs 2,50,000 in case of EPF, RF or Rs 5,00,000 in case of GPF
Add : (iii) interest accrued on closing balance plus interest on (ii) above

Example of computation of taxable & non-taxable PF contribution

So, let us say Mr Ram deposited Rs 50,000 per month in his EPF account where his balance as on 31st March 2021 was 30,00,000. In that case , his taxable and non-taxable contribution shall be as under

Non Taxable Amount as on 31st March 2022 will be Rs 30,00,000 + 2,50,000 + (32,50,000 x 8.5%=2,76,500)= Rs 35,26,250

Taxable Amount. will be Rs 4,50,000 =(6,00,000 – 2,50,000) + 8.5% * Rs 4,50,000= Rs 38,250

Taxable PF Contribution and Interest Calculator

This calculator is based on the provision u/s 10(11) , sec 10(12) and Rule 9D .

Section 10 (11) & Section 10(12) relates to PF interest exemption

Section 10(11) 

(11) any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 1925), applies or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette;
Following provisos shall be inserted in clause (11) of section 10 by the Finance Act, 2021, w.e.f. 1-4-2022 :

Provided also that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1st day of April, 2021 and computed in such manner as may be prescribed :

Provided further that if the contribution by such person is in a fund in which there is no contribution by the employer of such person, the provisions of the first proviso shall have the effect as if for the words "two lakh and fifty thousand rupees", the words "five lakh rupees" had been substituted;

Section 10(12) 

(12) the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule;
Following provisos shall be inserted in clause (12) of section 10 by the Finance Act, 2021, w.e.f. 1-4-2022 :
Provided also that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1st day of April, 2021 and computed in such manner as may be prescribed :
Provided further that if the contribution by such person is in a fund in which there is no contribution by the employer of such person, the provisions of the first proviso shall have the effect as if for the words "two lakh and fifty thousand rupees", the words "five lakh rupees" had been substituted;

As per Finance Act 2021

Is exemption of PPF interest covered under section 10(11) ?

The provision of section 10(11) mentions ” any other provident fund set up by the Central Government and notified” . That leaves the question if the Public Provident Fund was notified by Central Government as PF for the purpose of section 10(11) of the Income Tax Act . The simple answer is yes. The govt issued Notification: S.O.2430 dt2/07/1968 which is as under :

Notification: S.O.2430 Date of Issue: 2/7/1968

In pursuance of clause (11) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies the Public Provident Fund established under the Public Provident Fund Scheme, 1968, as a provident fund to which the said clause shall apply 

Therefore it is clear that section 10(11) of Income tax Act provides exemption to any interest paid on the balance of PPF deposits.

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Will contribution to PPF be added to PF contribution to determine taxable consideration?

This is a hot topic after the Finance Act 2021 brought in a new proviso by which PF authorities are required to compute the taxable contribution and non-taxable contribution to provident fund -EPF or GPF or recognised funds.

In my considered opinion, the contribution to PPF can not be aggregated to any contribution that you have made in GPF or EPF or recognised PF, because Proviso to section 10(11) and section 10(12 )does not say so . the language used in the proviso to those section uses the phrase “that fund ” and not “those funds” . See the language

The relevant part of the Proviso to section 10(11) is

Provided also that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1st day of April, 2021 and computed in such manner as may be prescribed 

It means , in my opinion , the legislature did not mean to aggregate contribution in more than one type of provident fund Fact is also that a person can not have more than one type of provident fund .The only exception is PPF that anyone can subscribe to apart from being subscriber to EPF or GPF or a recognised PF.

It is also a matter of import that the PPF is not just form employees , but all Indian citizens who are resident of India .EPF or GPF or recognised PF are for employees. The maximum PPF contribution can be 1.5 Lakh a year whereas total exempted amount for PF contribution is Rs 5 lakh under the new proviso tp section 10(11) or 10(12) of the I T act.

So, that also signifies that the amendment to tax the contribution above a threshold limit was never meant to include the PPF which ordinary citizens may also subscribe to apart from employees.