Govt introduces rules for calculating taxable interest on PF contributions beyond specified limits

Government has issued rules for calculating taxable interest on contribution to provident fund beyond Rs 2.5 lakh for cases where employer is contributing, and Rs 5 lakh where employer isn't contributing.

Two separate accounts within the PF account will have to be maintained during 2021-22, and onwards, for segregating the taxable and non-taxable contributions made, the Central Board of Direct Taxes (CBDT) said in a notification issued Wednesday.

Taxable contribution account will be the aggregate of the contribution made by the person beyond the threshold limit and interest accrued on the contribution, minus any withdrawals made.


On the other hand, non-taxable contributions will be the aggregate of closing balance as of March 31, 2021, contributions made by the account holder that are not included in taxable contribution account and interest accured on the total sum, minus any withdrawals.

The rules will come into effect from April 1, 2022, the notification added.

The government had in the Union Budget this year introduced the provision to tax interest income on contributions above Rs 2.5 lakh a year.

Finance minister Nirmala Sitharaman then raised the limit on the annual contribution to provident fund accounts for tax-free interest to Rs 5 lakh from Rs 2.5 lakh for funds where there is no contribution by the employer.

"Most often, it is employee contribution and employers’ contribution, but there are contributions, which are only employee and no employer contribution is made. In such cases, that amount is raised to Rs 5 lakh,” Sitharaman had said.

The government had introduced the change to plug the misuse of the benefit by high-income earners who were making large deposits in the employee provident fund or EPF. Interest earned on the provident fund corpus is tax-free and no tax is levied at the time of withdrawal, making it an attractive investment option.

Private sector subscribers to the Employees’ Provident Fund Organisation (EPFO) also have employer contributions in their retirement savings. Government employees contribute to the general provident fund (GPF) without any employer contribution.

The higher limit of Rs 5 lakh on provident fund contributions will largely benefit government employees as it’s available in those cases where the employer is not making a contribution.