Changes In Taxability of PF

A Summary by TaxHerbs

TaxHerbs 9/1/21 Your Knowledge partner

1) Introduction
An Employee Provident Fund is a scheme that has been put in place for all salaried employees working
in a corporate organization with 20 or more employees. Employer and employee contribute top the
fund and amount accumulated in the funds and interest earned thereon is paid to the employee on
his retirement. However, an employee, in certain circumstances, is allowed to withdraw a sum from
his provident fund account even before his retirement.

The provident funds can be categorized into a) Statutory b) Recognised c) Unrecognised and Public
provident fund (PPF).

2) Taxability of Provident Fund

The tax implications in case of provident fund can be understood separately for the time of
contribution, accrual of interest and withdrawal.

a) At the time of contribution: Contribution up to 12% of basic salary + DA is exempt from tax.
However, it shall be taxable if contribution is above 12% or above Rs. 7,50,0000. Further,
employees contribution is eligible for deduction under Section 80
b) Interest accrued on the PF Balance: It shall be exempt for PPF. For recognised PF and Statutory
PF interest accrual is generally exempt except in following cases:
• Interest is above the notified rate;
• Interest relating to the employee's contribution above Rs. 5 lakh, in case no contribution is
made by employer;
• Interest relating to the employee's contribution above Rs. 2.5 lakh, in case employer has also
contributed to the fund.
c) At the time of withdrawal:

At the time of
Withdrawl

Before 5 years After 5 years

For Unrecognised and

Recognised fund: Sum
For Statutory PF: of Employers
Exempt contribution and
Interest on Employer &
Employee contribution
shall be taxable
For Unrecognised fund:
For Statutory Sum of Employers
PF and contribution and Interest
Recognised PF: on Employer & Employee
Exempt contribution shall be
taxable
3) Amendment by the Finance Act, 2021
As interest on the contribution made to statutory provident fund, recognised provident fund and the
public provident fund is exempt from tax at the time of accrual as well as withdrawal, the Government
noticed that some employees are contributing a huge amount to these funds. Thus, to curb this
practice, the Finance Act, 2021 has amended Section 10(11) and Section 10(12) to provide that
exemption shall not be available for the interest income accrued during the previous year on the
recognised and statutory provident fund in the account of the person to the extent it relates to the
contribution made by the employees in excess of Rs. 2,50,000 in a previous year. However, if such
person has contributed in a fund in which there is no contribution by the employer, limit of Rs.
2,50,000 shall be increased to Rs. 5,00,000.

4) Introduction of Rule for computation of taxable interest (Notification

No. 95/2021, dated August 31, 2021)
The CBDT on August 31, 2021 have notified Rule 9D for calculating the taxable portion of interest
pertaining to the contribution made to a statutory or a recognized provident fund in excess of
threshold limit of Rs. 2.5 lakh or 5 lakhs as the case may be.

As per the explanation, non-taxable contribution to the PF shall be computed in the following manner:

S. No. Particulars Amount

i) Closing balance in the account as on 31st day of March 2021 xxx
ii) Contribution made in the account during the previous year 2021-2022 xxx
and subsequent previous years, which is not included in the taxable
contribution account; and
iii) Interest accrued in clause (i) and (ii) above xxx
Less: Withdrawal, if any (xxx)
Non-taxable contribution to account xxx

Taxable contribution to the PF shall be computed in the following manner:

S. No. Particulars Amount

i) Contribution by a person in financial year 2021-22 and onwards to the xxx
account in excess of threshold limit (Rs. 2.5 lakhs/Rs. 5 lakhs)
ii) Interest accrued in clause (i) above xxx
Less: Withdrawal, if any (xxx)
Non-taxable contribution to account xxx

The interest accrued in the taxable contribution account shall be taxable under the head 'Income
from other sources.

Example
Mr. Employee is working at The Financial Herbs (TFH) a vertical of TaxHerbs. He maintains an EPF
account and his opening balance is Rs. 5,50,000. His annual CTC is Rs. 30 lakhs with break-up as under:

Particulars Monthly Annual

Basic Salary 200,000 24,00,000
Special Allowance 24,200 2,90,400
Employee’s contribution to PF (15% of basic salary) 30,000 360,000
 Employer’s contribution to PF 1,800 21,600

Computation of taxable and non-taxable contribution to PF:

Particulars Non-taxable Taxable

contribution contribution
Opening Balance 550,000
Contribution during the year: (a) Up to Rs. 250,000 250,000 110,000
(b) In excess of Rs. 250,000 (Rs. 360,000 less Rs.
250,000)
Total balance (before interest) 800,000 110,000
Interest for the financial year 2021-22 (assuming rate 68,000 9,350
of interest 8.5%)

Interest income of Rs. 9,350 on taxable contribution shall be taxable in the hands of the employee in
the assessment year 2022-23 under the head income from other sources.

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