PF Contribution and Interest: What's Taxable and What's Not

By greytHR
2 minute read ● April 07, 2022
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PF Contribution and Interest: What's Taxable and What's Not

Over five crore Provident Fund subscribers are impacted by the PF- and tax-related changes made by the Government of India!

In our episode of Sampark Meets, we invited two speakers from the greytHR partner network. The speakers, Jay Shah, Founder & Director, Exertion HR Solutions Pvt. Ltd. and Vishwa Shah, Chartered Accountant, illuminated the attendees on the taxability of PF contributions made by employees. They also spelled out the impact of the new rules on employers. Here are the highlights of the webinar.

Higher PF Contributions to Be Taxable

The Union Budget 2021 introduced the below amendments with regards to excessive EPF contributions by individual employees.

  • Interest earned on employee contributions above INR 2.5 lakhs (during the financial year) will become taxable at the regular rate. This type of contribution is called a contributory fund, where both the employee and employer make contributions.
  • In the case of PF contributions made in an employee's individual capacity, the limit is increased to INR 5 lakhs. Known as a non-contributory fund, this account has investments made without the employer's contribution.

The aforementioned amendment applies to any contribution made on or after 1 April 2021.

One PF Account, Two Contribution Types

The CBDT notification on 31 August 2021 substantiated the amendment and framed the below rules for its implementation.

As per Rule 9D, PF authorities will bifurcate the PF accounts for every employee. Named as taxable contribution account and non-taxable contribution account, both will be under the same UAN id of the employee. This bifurcation does not imply two different PF accounts! Now let’s see what they include:

Non-taxable contribution account:

  • Closing balance as of 31 March 2021
  • Employee contribution made (within the limit) on or after 1 April 2021
  • Interest earned on both

Taxable contribution account:

  • Employee contribution made (above the limit) on or after 1 April 2021
  • Interest earned on the above

An Illustration for Better Understanding

Shyam of XYZ Co. makes a PF contribution of INR 25,000 per month (INR 3 lakhs/annum) during FY 2021-22. He already had a closing balance of INR 20 lakhs as of 31 March 2021.

At an 8% rate, the total interest accrued on the previous year's closing balance is INR 1.60 lakhs. The interest on the current year's contribution above the threshold of INR 2.5 lakhs (INR 50,000) is just INR 2,000. Therefore, this is the only taxable amount.

No TDS Commitment for Employers

Starting FY 2021-22, interest income in the Employees' Provident Fund (EPF) is taxable under income from other sources (IFOS). Since employees receive it directly, there is no liability on the part of the employer to deduct TDS.

Employer's Contribution to Become Taxable

The Union Budget 2020 made some amendments to start taxing an employer's contribution to PF, NPS and superannuation. Until then, high-level executives were enjoying this tax-free benefit, thanks to their employers.

Applicable from 1 April 2020, an employer's contribution in excess of INR 7.5 lakhs (and its interest, dividend, etc.) has become taxable to the employee.

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