New IT Rule 9D on ‘Taxability of interest on PF contributions above Rs. 2.5 lac’: CBDT Notification 95/2021

In line with amendments in IT Section 10(11) and 10(12) made by the Finance Act 2021, CBDT notifies the Income-tax (25th Amendment) Rules, 2021 applicable w.e.f. 01/04/2022, vide Notification 95/2021 dt. 31/08/2021, to insert new IT Rule 9D on ‘taxability of interest on PF contributions above Rs. 2.5  lacs’ in a financial year. Further, in case where no PF contribution is made by the  employer (usually in the case of Govt. Employees), then PF interest will be exempt from tax for contributions upto Rs. 5 lacs in a financial year.

From AY 2022-23, tax exemption has been withdrawn in respect of interest income relatable to employees’ contributions made to recognised/ statutory provident fund in excess of Rs. 2.5 Lacs / Rs. 5 Lacs in the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 and the amount of such taxable interest income shall be computed as per the procedure prescribed in newly inserted IT Rule 9D, which also provides for 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.

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.

CBDT Income Tax Notification 95/2021 dt. 31/08/2021: Income-tax (25th Amendment) Rules, 2021 applicable w.e.f. 01/04/2022 notified to insert New IT Rule 9D on ‘taxability of interest on PF contributions above Rs. 2.5 lac’

G.S.R. 604(E).- In exercise of the powers conferred by the first proviso to clause (11) of section 10 and the first proviso to clause (12) of section 10 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 (25th Amendment) Rules, 2021.

(2) They shall come into force on 01/04/2022.

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 31/03/2021;

(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.

Note : The principal rules were published in the Gazette of India, Extraordinary, Part-II, Section-3, Sub-section (ii) vide number S.O. 969(E) dated 26/03/1962 and were last amended vide notification number G.S.R. 578(E) dated 18/08/2021.