Taxability of interest on PF contributions above Rs. 2.5 lac

With modifications to the Finance Act of 2021, the government has removed the benefit of tax exemption (from April 1, 2021 and onwards) that was formerly provided for interest income received by taxpayers on their provident fund contributions. However, the CBDT has been waiting for their precise guidelines to establish their taxability for a long time.

Now, the CBDT has issued Notification No. 95/2021, dated August 31, 2021, which adds a new Rule 9D to the income tax rules, which will be effective for the FY 2021-22 and subsequent years.

From FY 2021-22 and onwards, two Provident Fund accounts will be kept to determine the share of interest that would be taxed for contributions made above the threshold limit of Rs. 2.5 lacs for non-government employees and Rs. 5 lacs for government employees, as per this new Rule 9D.

This Rule 9D also specifies the method of arriving the balance of both “Taxable” and “Non-Taxable contribution” as follows: -

a) Non-Taxable Contribution account shall be the aggregate of the following:
i. Closing balance in the account as on 31st March, 2021.
ii. any contribution made by the person in the account during the previous year 2021-22 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) above.
as reduced by the withdrawal, if any, from such account.

b) Taxable Contribution account shall be the aggregate of the following: -
i. contribution made by the person in a previous year in the account during the previous year 2021-22 and subsequent previous years, which is in excess of the threshold limit as specified above.
ii. interest accrued on sub clause (i) above,
as reduced by the withdrawal, if any, from such account.

Therefore, now if your contribution exceeds the threshold limit of Rs. 2.5 lacs / Rs. 5 lacs (as applicable) annually, the interest earned on such excess contributions will be now be taxable in your hands w.e.f. Financial year 2021-22 and onwards.