Taxability of Employee contribution to PF / Employee Provident Fund in Budget 2021.

Question BankCategory: Income TaxTaxability of Employee contribution to PF / Employee Provident Fund in Budget 2021.
AvatarNaresh asked 3 months ago

Budget 2021, have made contribution to PF taxable, Is my contribution to Provident fund is made taxable. Please clarify whether my contribution to PF after 1st April 2021 (w.e.f FY 2021-22) is taxable or not. 

2 Answers
AvatarAditya answered 3 months ago

Following statement is given by Finance minister in Budget 2021 regarding taxability of Provident Fund:-

“In order to rationalize tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earned on the employee’s contribution to various provident funds to the annual contribution of ` 2.5 lakh. This restriction shall be applicable only for the contribution made on or after 01.04.2021”

The following lines were found in Finance bill 2021:-

“Clause (11) of section 10 provides for exemption with respect to any payment from a provident fund to which the Provident Funds Act, 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.”
“Clause (12) of the section 10 provides for exemption with respect to the accumulated balance due and becoming payable to an employee participating in a recognized provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule”

It is proposed to insert a proviso to such of the aforesaid clauses so as to provide that the provisions of these clauses 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 provided by rules.

 

Current Provision of Provident Fund:-

  1. Employee’s Contribution to PF (except URPF) is eligible for deduction u/s 80C upto the limit provided in this section (currently 150000).
  2. Currently, Interest on SPF (Statutory Provident Fund) is fully exempt .
  3. Currently, Interest on RPF (Recognized Provident Fund) is exempt upto 9.5%. and interest exceeding 9.5% is taxable. On maturity (if minimum service period of 5 year is met except in case of ill health or discontinuance of business) the whole amount is exempt. (if condition not me then taxable like URPF)
  4. Currently whole Interest along with employer’s contribution of URPF (Unrecognized Provident Fund) is taxable at the time of repayment.
  5. TDS on taxable part is deducted u/s 192 of Income tax Act.
  6. For more detail above Provident Fund provisions and taxable Click Here

 

From the provision given in Finance bill 2021 (Budget 2021), the following points may please be noted:-

  1. The whole provision is about taxability of interest earned on employee’s contribution to Provident Fund. (It is not about taxability of contribution but about taxability of interest on employee’s contribution)
  2. W.e.f 1st April 2021, the exemption of interest is restricted to contribution (in SPF, RPF & VPF & PPF) upto 250000/- and if employee’s contribution to PF is more than 250000/- in a year (w.e.f FY 2021-22) then interest on contribution in excess to Rs. 250000/- will be taxable.
  3. Clause 12 will also not apply to this contribution in excess of Rs. 250000/-. Hence interest on accumulated balance may also be taxable.

Is interest on contribution to PPF (Public Provident Fund) is also made taxable? 
As per above proposed clause, PPF is also exempt under clause 11 & 12 of section 10. and proposed taxability clause is inserted for clause 11 & 12. Hence PPF is also covered for seeking the contribution in excess of Rs. 250000/- But read the proposed amendment carefully:-

“It is proposed to insert a proviso to such of the aforesaid clauses so as to provide that the provisions of these clauses 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 provided by rules.”

 

Use of word “ two lakh and fifty thousand rupees in any previous year in THAT FUND.” Hence limit of Rs. 250000/- is to be seen fund wise. Hence RPF & PPF may be seen separately. Maximum contribution to PPF is 150000/- in a year hence interest of PPF is not be taxable under the proposed provision. 

 

Use of word “computed in such manner as may be provided by rules.” Hence clarifications/rules will be provided for computation of the same.

 

 

AvatarNaresh answered 3 months ago

Thanks

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