Taxability of Interest on Contribution to Provident Fund (PF)
Introduction
Interest on employee contributions to Recognized Provident Fund (RPF) and Statutory Provident Fund (SPF) is exempt under Sections 10(11) and 10(12). However, exemptions are restricted for contributions exceeding Rs. 2,50,000 (or Rs. 5,00,000 for funds without employer contributions).
Key Provisions
- Employer’s Contribution
- Interest on contributions up to 9.5% is exempt. [Notification No. 24/2011 [F. No. 142/14/2010- (TPL)]/S.O. 1046(E), Dated 13-5-2011]
- Excess interest is taxable under “Salaries” and subject to TDS under Section 192.
- Employee’s Contribution
- Interest on an employee’s EPF/SPF contribution is exempt under Sections 10(11) and 10(12). However, interest exceeding 9.5% is taxable.
- Interest on contributions exceeding 2,50,000 (or Rs. 5,00,000 for funds without employer contributions) is taxable under “Income from Other Sources.”
- Separate Accounts for Taxable Contributions
- From FY 2021-22, PF accounts must maintain separate records for:
- Non-taxable contributions.
- Taxable contributions (amounts exceeding the threshold).
Computation of Taxable Interest (Rule 9D)
- For FY 2021-22:
- Taxable contribution = Contributions exceeding 2,50,000/Rs. 5,00,000 + Interest thereon −Withdrawals.
- For Subsequent Years:
- Taxable contribution = Closing balance of taxable account (previous year) + Current year excess contribution + Interest − Withdrawals.