FinMin prescribes rules for calculation of taxable interest on contribution to EPF/GPF

The Finance Ministry said that tax on interest pertaining to contribution towards Employees’ Provident Fund (EPF) or General Provident Fund (GPF) exceeding ₹2.5 lakh will not be retrospective.

The rules released by the Ministry prescribes calculation of taxable interest relating to contribution towards EPF or GPF with prospective effect and that the threshold for contribution to avail non-taxable interest could go to ₹5 lakh, in case of government employee.

These rules will cover 1.22 lakh people whose income is more than ₹2 lakh a month, though it is just 0.25 per cent of all subscribers. GPF is for government employees while EPF is for employees working in the private sector.

The rules are a follow-up to the Budget announcement where it was proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds on an annual contribution of ₹2.5 lakh. This restriction will be applicable only for the contribution made on or after April 1, 2021. Accordingly, new rules will come into effect from April 1, 2022.

Separate accounts

The rules further say that the income earned through interest on contribution of over and above ₹2.5 lakh (₹5 lakh in case of no contribution from the employer) will be taxable. For the purpose of calculation of taxable interest, separate accounts within the provident fund account will be maintained during the current fiscal year (2021-22) and onwards for taxable contribution and non-taxable contribution made by a person.

Taxable contribution account will be an aggregate of contribution in excess of the threshold limit (₹2.5 lakh or ₹5 lakh) along with the interest accrued on that. Withdrawal will then be subtracted to arrive at the final figure.

Non-taxable contribution account will be aggregate of the closing balance in the account as on March 31, 2021, contributions during fiscal year 2021-22 and subsequent years minus the amount included in the taxable contribution and interest accrued on these two. Here, too, withdrawal will be subtracted.

Rahul Charkha, Partner with Economic Laws Practice feels the amendment reflects the intent of the government to disincentivise investments in fixed income generating avenues which in turn would lead to increased fund flows in other sectors of the economy. This would surely lead to increased administrative compliance towards maintaining separate sub-accounts within the existing provident fund account to compute the taxability.

“Unlike botched attempts to tax provident fund earnings in the past, the threshold under the current amendment clearly signifies the objective to target high-salaried individuals and not the entire salaried taxpayer class. Post this amendment, impacted taxpayers should revisit their long-term financial plans and consider exploring other investment alternatives,” he said.

Shailesh Kumar, Partner with Nangia & Co LLP said that the notification issued by CBDT has finally put an end to the ambiguity which arose with the introduction of taxation of interest on provident funds with contribution above specified threshold.

Rule 9D inserted in the Income tax Rules, 1962 has specified that separate accounts within the PF accounts shall be maintained clearing segregating the taxable and non-taxable contributions to PF along with interest thereon. “This shall provide a convenience of calculation to the tax payers for segregation of interest to be offered to tax,” he said.

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