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Alerts:

Direct Tax Alert - CBDT notifies new Rule 9D for calculation of taxable interest in Provident Fund account on excess Employee contributions

06 September 2021

Background

In the recent past, changes were introduced to tax the excess contributions and interest thereon made to the Indian social security schemes, especially the Provident Fund (PF) account. BDO India’s earlier alert1 captured the update on mechanism for taxability of interest on employer’s contributions to the schemes.

The Finance Act, 2021 amended Section 10(11) and Section 10(12) of the Income-tax Act, 1961 (IT Act) to introduce taxability of accrued interest on employee’s contribution in excess of below threshold limits w.e.f. Financial Year (FY) 2021-22:

  • INR 0.25mn in a fund where both employer and employee contributes
  • INR 0.50mn in a fund where only employee contributes

The Central Board of Direct Taxes (CBDT) has now issued a Notification2 inserting new Rule 9D to the Income-tax Rules, 1962 (IT Rules) to provide the mechanism of computing taxable annual accretion on such excess employee contributions.

We, at BDO in India, have analysed and summarised the said Notification and provided our comments hereunder:

Mechanism for computing taxability of annual accretion on excess employee contributions:

As per Rule 9D, for the purpose of tax calculation, separate accounts shall be maintained within the Provident Fund account from FY 2021-22 and onwards for the taxable and non-taxable contribution by an individual employee. The same is tabulated below:

Taxable contribution account

Non-taxable contribution account

Employee contributions made during the FY from FY 2021-22 onwards in excess of the threshold limits of INR 0.25mn or INR 0.50mn (as the case may be)

Add: Interest accrued thereon

Less: Any withdrawal from the account

Closing balance as on 31 March 2021

Add: Employee contributions from FY 2021-22 onwards which is not included in the taxable contribution account

Add: Interest accrued thereon

Less: Any withdrawal from the account

It is to be noted that only the interest accrued in Taxable contribution account would be taxable in the hands of the employee under the income head ‘Income from Other Sources’. The interest accrued in Non-taxable contribution account shall continue to be tax exempt.

BDO Comments

This is a welcome step to clarify the mechanism of computation of taxable interest during the ongoing year itself. However, some of the practical aspects that need consideration would be:

  • Segregation and maintenance of separate taxable and non-taxable contribution portion in the PF account.
  • Consideration of the applicable interest rate based on the pronouncement/publishing date.
  • Any income-tax withholding obligations and reporting requirements, etc.

1https://www.bdo.in/en-gb/insights/alerts-updates/direct-tax-alert-cbdt-prescribes-rules-for-determining-taxable-accretion-on-certain-social-securit

2Notification No. 95/2021/ F. No. 370142/36/2021-TPL dated 31st August 2021