How to Calculate Taxable Interest on PF Contributions

 - Sakshi Post

Following the implementation of a new provision in Budget 2021 that made interest on PF contributions beyond Rs2.5 lakh taxable, the guideline was issued.

The government has introduced new guidelines for calculating taxable interest on PF contributions that exceed certain thresholds.

The Central Board of Direct Taxes (CBDT) said in a notification released Wednesday that two distinct accounts under the PF account will have to be maintained from 2021-22 onwards to segregate the taxable and non-taxable contributions made.

The government has announced regulations for computing taxable interest on provident fund contributions above Rs 2.5 lakh in circumstances where the employer contributes, and Rs 5 lakh in cases where the employer does not contribute.

Separate accounts inside the provident fund account must be kept to calculate taxable interest.

Provident Fund (PF): In the hands of the employee, the interest generated on a provident fund balance is now tax-free. However, Finance Minister Nirmala Sitharaman recommended taxing interest on certain provident funds where the set amount is exceeded in Budget 2021. The government has published a notice on the calculation of taxable interest on contributions to a provident fund or recognised supply fund that exceeds a certain threshold. On April 1, 2022, the Income-tax (25th Amendment) Rules, 2021 will take effect.

"CBDT has been pro-active in providing necessary clarifications through its notifications and circulars to ensure that the tax payers have the 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 aspect which concerns 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 law states that interest gained on an employee's contribution of more than Rs 2.5 lakh in a year is taxable in the hands of the individual, with a monetary ceiling of Rs 5 lakh for government employees.

The Central Board of Direct Taxes placed the following regulation (9D) after rule 9C of the Income-tax Rules, 1962:

(1) For the first and second provisos to clauses (11) and (12) of section 10, income by way of interest accrued during the previous year that is not exempt from inclusion in a person's total income under the said clauses (hereinafter referred to as the taxable interest) is computed as the interest accrued during the previous year on the taxable contribution.

(2) to calculate taxable interest under sub-rule (1), separate accounts within the provident fund account for taxable and non-taxable contributions made by a person must be kept during the previous year 2021-2022 and all subsequent preceding years.

Here is the calculator technique to find out the tax on PF interest in Budget 2021.

How to Calculate

(a) The non-taxable contribution account is made up of the following items:

(i) the account's closing balance as of March 31, 2021;

(ii) any non-taxable contribution made by the individual in the account during the preceding years of 2021-2022 and future years; and

(iii) interest earned on subclauses I and (ii), as reduced by any withdrawals made from such account;

(b) The taxable contribution account is made up of the following items:

(i) a contribution over the threshold limit made by the person in a prior year in the account during the previous year 2021-2022 and succeeding previous years; and

(ii) the interest earned on sub-clause I as reduced by any withdrawals made from the account; and

(c) The term "threshold limit" refers to the following:

(i) If the second proviso to clause (11) or clause (12) of section 10 applies, the amount is five lakh rupees; and

(ii) in other situations, two lakh and fifty thousand rupees.

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