The Central Board of Direct Taxes (CBDT) on Wednesday notified the manner in which interest income accrued in the provident fund PF contributions of a person above a specified limit will be taxed.  

It was announced in Budget 2021 that interest on Employees’ Provident Fund (EPF) and Voluntary Provident Fund (VPF) contributions above Rs 2.5 lakh in a financial year will be taxable. The Central Board of Direct Taxes (CBDT) has, on August 31, 2021, notified the rules regarding the taxation of the interest on the excess EPF contributions. According to the notification, for the purpose of calculation of taxable interest, separate accounts within the provident fund account shall be maintained during and from the financial year 2021-22.

The Income-tax (25th Amendment) Rules, 2021 says that for the sake of calculation, separate accounts within the provident fund account shall be maintained from 2021-22 for taxable and non-taxable contribution made by a person. 

“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.

However, in the Union Budget 2020, employers contribution to Provident Fund or PF Contributions, National Pension Scheme (NPS) and Superannuation Fund over Rs.7,50,000 was brought under the ambit of taxability. Any excess contribution beyond Rs.7,50,000 would be taxed as perquisites in the hands of the employee. The amendment intended to bring the high-income earners excess benefits under the taxability net.  

Further, the Union Budget 2021 introduced taxability on the interest accrued on the Employees’ Provident Fund (EPF) account for contributions over Rs.2,50,000. The government intended to rationalise the tax exemption for the high-income earners who earned tax-free income by putting a threshold limit.  

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The new rule clarifies that the non-taxable contribution account will comprise of the closing balance in the PF account as on 31 March 2021 as well as any contribution made by the person in the account in 2021-2022 and in later years within the threshold specified and the interest accrued on these. The amount deposited above the specified threshold will be in the taxable contribution account and the interests paid on it will get taxed.  

As per government estimates, about 1,23,000 high income earners are making more than ₹50 lakh a year in tax free interest on average from their provident fund accounts, Mint had reported on 4 February quoting a government official.  

These high net worth individuals (HNIs) account for about 0.27% of the 4.5 crore Employees’ Provident Fund (EPF) account holders.