At present, the interest earned on provident fund balance is fully exempted from tax.
In Budget 2021, the Finance Minister had proposed taxability of interest on various provident funds, where the specified limit exceeds. As per this new rule, interest earned on an employee’s contribution above Rs 2.5 lakh in a year will become taxable in the hands of the employee while it will Rs. 5 lakh for the government sector employees.
The extract of the notification given herebelow:
(1)For the purposes of the first and second provisos to clauses (11) and (12) of section 10 , income by way of interest accrued during the previous year which is not exempt from inclusion in the total income of a person under the said clauses (hereinafter in this rule referred to as the taxable interest), shall be computed as the interest accrued during the previous year in the taxable contribution account.
(2) For the purpose of calculation of taxable interest under sub-rule (1), separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person.
Explanation: For the purposes of this rule,-
(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 person in the account during the previous year 2021-2022 and subsequent previous years, which is not included in the taxable contribution account; and (iii) interest accrued on sub- clause (i) and sub- clause (ii),as reduced 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 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; and (ii) interest accrued on sub- clause (i), as reduced by the withdrawal, if any, from such account; and
(c) The threshold limit shall mean:
(i) five 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 cases.
Extract of Section 10 (11) & (12) for reference given here below:
(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;
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.