Although, budget 2021 Amendment in the said section to withdraw tax exemption for interest on employee’s contribution to PF where such contribution exceeds Rs 2.5 lakh in a financial year. Such interest on employee’s contribution to PF is taxable under the head ‘Income from other sources’.
Subsequently, on August 31, 2021, the Central Board of Direct Taxes (CBDT) notified new Rule 9D under the Income Tax Rules to prescribe the methodology for computing such taxable interest. The rule provides the following:
One) Separate EPF accounts will be required to be maintained for taxable contributions and non-taxable contributions made by an employee, i.e., contributions made by an employee over and above the limit will be kept in a separate EPF account.
b) The ‘Non-taxable EPF Contribution Account’ would be the sum of the following:
I. Balance in employee’s EPF account till 31st March 2021
Employee’s contribution within the prescribed limit of Rs 2.5 lakh during the second financial year 2021-22 and future years
iii. Interest earned on the above as deducted by the withdrawal, if any, from the EPF account
C) The ‘Taxable EPF Contribution Account’ will be the sum of the following:
I. Employee contribution made during the financial year 2021-22 and future years, over and above the prescribed limit of Rs 2.5 lakh
Second interest earned on the above as deducted by the withdrawal, if any, from the account
Interest earned in taxable contribution account will not be eligible for tax exemption.
Income Tax Rules also clarifies that refund of income tax exemption is tentative (from 1st April, 2021) as it will include any interest on balance in EPF account as on 31st March 2021 as part of ‘non-taxable contribution’. does. account’.
Apart from Employees’ Provident Fund Organization (EPFO), all private provident fund trusts will also be required to enforce this requirement and maintain separate accounts for taxable and non-taxable contributions made by employees.
While the tax rules provide clarity on the computation of such taxable and non-taxable contributions, there is still ambiguity on certain aspects:
One. Point of taxation of such interest on excess contribution to EPF of the employee – Is such interest taxable only in the hands of employees in the year of termination of employment or will it be taxable on year to year basis?
b. Withholding Tax (TDS) liability to employer or private PF trust on such taxable interest As per the Income Tax Act, the liability to deduct TDS on private PF trusts is only in limited circumstances, such as termination of employment before completing 5 years of continuous service. There is no specific requirement in the Income Tax Act to require such trusts to deduct TDS on credit of interest in ‘Taxable Contribution Account’. Further, since such interest is not taxable as ‘salary’ income, the employer also cannot be liable to deduct TDS.
However, on April 5, 2022, EPFO ​​issued a circular providing guidelines on computation of taxable interest and liability to deduct TDS. EPFO has clarified that TDS will be levied at the time of payment of credit or interest, whichever is earlier.
Additional complication for individuals is that the EPFO ​​is yet to credit the interest for the financial year 2021-22 in the EPF statement of the employees. Because of this, individuals will not be able to offer interest on the taxable contribution account for taxation while filing their personal income tax return for the financial year 2021-22, which is due to be filed by July 31, 2022.
For individuals covered under private trusts, if the trust has deducted TDS on interest on taxable contribution account and reported that in Form 26AS of the employee – the individual has the right to report such interest in the personal tax return. There will be no other option. However, it can be debatable whether such interest is taxable on a year-to-year basis or only on termination of employment.
This ambiguity may need to be addressed by the CBDT by making suitable amendments or by issuing necessary clarifications:
One. Time of taxation in the hands of employees; And
b. Requirement and timing of deduction of TDS on such taxable interest
(The author is partner at EY India)