Friday, September 3, 2021

Taxability of Provident Fund and other Fund Contribution and Interest thereon

Finance Act 2021, introduced taxability of interest on various provident fund, contribution exceeding the specified limit exceeds.

Earlier the interest earned on provident fund was fully exempt from tax in the hands of the employees. 

The CBDT Circular dated 31st August, 2021, read with Rule 9 D of Income Tax as applicable wef 1st day of April, 2022 and CBDT Notification dated 15.03.21 for Change in Rule 3B effective from 01.04.2021 the contribution to Provident fund and other funds by employer and interest there on has effected a high bracket salaried persons a lot.

Now through above mentioned Circulars the CBDT has given formulas that how to calculate the taxable portion of Provident Fund contribution and taxable interest on Provident Fund balance. As these guidelines are given by CBDT on 31.08.2021 and having impact on taxable portion in salary on high bracket salaried persons, we are trying to give a brief hereunder to calculate TDS on Salaries accordingly and planning or restructuring salaries.

CBDT NOTIFICATION NO. 11 DATED 5th MARCH, 2021 w.e.f 01 APRIL 2021 [RULE 3B]

AY 2021-22 ONWARDS 

In exercise of the powers conferred by sub-clause (viia) of clause (2) of section 17 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely: -

 1. Short title and commencement. — (1) These rules may be called the Income-tax (1st Amendment) Rules, 2021.

(2) They shall come into force from the 1st day of April, 2021.

 2. In the Income-tax Rules, 1962, after the rule 3A, the following rule shall be inserted, namely: ‒

 3B. Annual accretion referred to in the sub-clause (viia) of clause (2) of section 17 of the Act.

 For the purposes of sub-clause (viia) of clause (2) of section 17 of the Act, annual accretion by way of interest, dividend or any other amount of similar nature during the previous year (hereinafter in this rule referred to as the current previous year) to balance to the credit of the fund or scheme referred to in sub-clause (vii) of clause (2) of section 17 of the Act shall be the amount or aggregate of amounts computed in accordance with the following formula, namely: —

 TP= R*[(PC/2) + (PC1+ TP1)]

 Where,

 TP = Taxable perquisite under sub-clause (viia) of clause (2) of section 17 of the Act for the current previous year;

 TP1 = Aggregate of taxable perquisite under sub-clause (viia) of clause (2) of section 17 of the Act for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year (See Note);

 PC = Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5

lakh to the specified fund or scheme during the previous year;

 PC1 = Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5

lakh to the specified fund or scheme for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year (See Note);

 R = I/ Favg

 I = Amount or aggregate of amounts of income accrued during the current previous year in the specified fund

or scheme account;

 Favg = (Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the first

day of the current previous Year + Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the last day of the current previous year)/2.

 Explanation. — For the purposes of this rule, "specified fund or scheme" shall mean a fund or scheme

referred to in sub-clause (vii) of clause (2) of section 17 of the Act.

 Note: Where the amount or aggregate of amounts of TP1 and PC1 exceeds the amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the first day of the current previous year, then the

amount in excess of the amount or aggregate of amounts of the said balance shall be ignored for the purpose of

computing the amount or aggregate of amounts of TP1 and PC1.”.

 Illustration                                                                                                                      Rs. In lakhs

S No.

Particulars

FY 2020-21

FY 2021-22

1

Opening balance

60

96.35

2

Employer’s contribution to funds*

14.4

23.12

3

Employee’s contribution to funds*

14.4

23.12

4

Total contribution

88.8

142.59

5

Annual accretion

7.55

12.12

6

Closing balance

96.35

154.71

* All Employee benefits funds

 Computation of Taxable perquisites as per formula given in the guidance note:

 TP= R*[(PC/2) + (PC1+ TP1)]

 Where,

                                                                                                                                 Rs in Lakhs

S No.

Particulars

FY 2020-21

FY 2021-22

1

Excess contribution (PC)

6.9

15.62

2

PC/2

3.45

7.81

3

Average of opening & closing balance (Favg)

78.175

125.53

4

Accrued accretion/Favg (R)

0.097

0.097

5

Last year’s excess contribution (PC1)

Nil

6.9

6

Last year’s taxable perquisites (TP1)

Nil

0.33465

7

(PC/2) + (PC1+TP1)

3.45

15.04465

8

Taxable Perquisite (TP) (7*R)

0.33465

1.45933

 CBDT NOTIFICATION NO. 95 DATED 31.08.2021 w.e.f 01 APRIL 2022 [RULE 9D]

(AY 2022-23 onwards)

1. (1) These rules may be called the Income-tax (25th Amendment) Rules, 2021.

  (2) They shall come into force on 1st day of April, 2022.

2. In the Income-tax Rules, 1962, after the rule 9C, the following rule shall be inserted, namely: ‒

9D. Calculation of taxable interest relating to contribution in a provident fund or recognised

provided fund, exceeding specified limit-

(1)    For the purposes of the first and second provisos to clauses (11) and (12) of section 10, income by way of interest accrued during the previous year which is not exempt from inclusion in the total income of a person under the said clauses (hereinafter in this rule referred to as the taxable interest), shall be computed as the interest accrued during the previous year in the taxable contribution account.

(2)   For the purpose of calculation of taxable interest under sub-rule (1), separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person.

Explanation: For the purposes of this rule-

a)       Non-taxable contribution account shall be the aggregate of the following, namely-

   i.    closing balance in the account as on 31st day of March 2021;

            ii.   any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous

              years, which is not included in the taxable contribution account; and

            iii.  interest accrued on sub- clause (i) and sub- clause (ii), as reduced by the withdrawal, if any, from such account;

 b)       Taxable contribution account shall be the aggregate of the following, namely-

        i.       contribution made by the person in a previous year in the account during the previous year 2021-2022 and                               subsequent previous years, which is in excess of the threshold limit; and (ii) interest accrued on sub- clause (i) as                   reduced  by the withdrawal, if any, from such account; and

  c)       The threshold limit shall mean:

      i.    five lakh rupees, if the second proviso to clause (11) or clause (12) of section 10 is applicable; and                                  ii.    two lakh and fifty thousand rupees in other cases.”.

 

Clause 11 and Clause 12 of Section 10 of Income Tax Act

 

(11) any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 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;

 

(11A) any payment from an account, opened in accordance with the Sukanya Samriddhi Account Rules, 2014 made under the Government Savings Bank Act, 1873 (5 of 1873);

 

(12) the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule;

 (12A) any payment from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent of the total amount payable to him at the time of such closure or his opting out of the scheme;

(12B) any payment from the National Pension System Trust to an employee under the pension scheme referred to in section 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013) and the regulations made thereunder, to the extent it does not exceed twenty-five per cent of the amount of contributions made by him;

               

               In simple words, from AY 2022-23:

a)       interest income relatable to employees’ contributions made to recognised/ statutory provident fund in excess of Rs. 2.5 Lacs / Rs. 5 Lacs in the previous year shall be taxable

b)       the amount of such taxable interest income shall be computed as per the procedure prescribed in newly inserted IT Rule 9D,

c)       there shall be separate maintenance of accounts by the Statutory/ Recognised Provident Fund, in respect of taxable and exempt contributions made by the Members during the previous year 2021-22 and onwards.

Procedure of computing taxable and non-taxable amount of contribution-

·         Taxable contributions = [Excess of contributions made by the person in FY 2021-22 and subsequent years + interest accrued on such contributions – withdrawals from account, if any]       

·         Non-taxable contributions = [Closing balance as on 31 March 2021 + contribution made in FY 2021-22 and subsequent years not included above + interest accrued on above – withdrawals, if any]

        Accordingly, one should ensure that PF contributions do not exceed the specified limits, in a financial year, as mentioned         above, to avoid tax liability on PF interest on contributions in excess of such specified limits.