There are very few investments that fall under the Exempt-Exempt-Exempt category. Contribution to the Employee Provident Fund is one such investment. Employees' contribution to the provident fund is deductible up to Rs.1,50,000/- u/s 80C. Withdrawal from the provident fund is also tax-free. Up until last year interest credited on the provident fund was also exempt from tax. The Government noticed that few employees contributed huge sums to the provident funds and earned a large amount of interest on it which was tax-free. To curb this practice the Government in Finance Act 2021 made amendments to section 10(11) and section 10(12).
Section 10(11) provides an exemption in relation to a Statutory Provident Fund. Section 10(12) provides an exemption in relation to a Recognised Provident Fund. According to the amendments made to section 10(11) and section 10(12) interest accrued on the contribution made to the provident fund in excess of Rs. 2,50,000/- will be taxed. However, if the employer has not made any contribution to the said fund then interest accrued on the contribution made in excess of Rs. 5,00,000/- will be taxed. This amendment is applicable from FY 2021-22 (AY 2022-23).
Let us understand this with the help of the below table:
|Amount of contribution made to the PF (in Rs.)||Whether the employer contributed?||Whether interest accrued will be taxed?||Amount of taxable interest (in Rs.)|
|3,00,000||Yes||Yes||Interest accrued on 50,000 (3,00,000 - 2,50,000)|
|6,00,000||No||Yes||Interest accrued on 1,00,000 (6,00,000 - 5,00,000)|
|6,00,000||Yes||Yes||Interest accrued on 3,50,000 (6,00,000 - 2,50,000)|
How will this amendment affect me?
The amendment made to sections 10(11) and 10(12) will affect only those taxpayers who fall under the high-income group and who were parking huge sums in EPF. If you are the one who invests an average or normal amount in a provident fund this amendment will not impact you.
How will interest earned on contributions made to EPF be taxed?
Interest earned on the excess contribution made to the provident fund will be taxed under Income from other sources. The interest so earned will be taxed at normal rates.