Section 10-12 of Income Tax Act

Up to now, income received from Provident Fund was exempted under the provisions of Section 10(11) and 10(12). But ever since the introduction  of the amendment in the provisions that were introduced in the Finance Act, the interest income that is earned from Provident Fund  will now be liable for taxation if it is more than the stipulated limit.

In this article we will go through the amendments that were introduced in the Finance Act, 2021. We will also learn about the New Rule 9D that was inserted in the Income Tax Rules.

Amendments Introduced into the Finance Act

According to Section 10-12 of Income Tax Act, the income generated from the interest that is gained by an employee on the contributions that he makes to “Statutory Provident Fund” and “Recognised Provident Fund.” But seeing the Finance Act, a new provision is inserted in Section 10-12 of Income Tax Act. The essence of the amendments that are made in order to tax the income generated from interest from the Provident Fund is stated below:

• The interest that was gained from a “Statutory Provident Fund” or “Recognised Provident Fund” in the previous year is more than the specified exemption limit.
• Interest is related to the contributions that an employee makes.
• The specified exemption limit above which the interest will be liable for taxation is given below:
  • If the employer’s contribution is also included in the contribution, then the exemption limit will be Rs. 250000.
  • If the employer’s contribution is not included in the contribution, then the exemption limit will be Rs. 500000.
• The amendment will remain effective from Assessment year 2022-2023.
• According to the amendment, the manner of calculating the taxable interest will be prescribed later.

Manner of calculating Taxable Interest on PF Contribution

The 25th amendment(Income tax rules) was introduced in the notification that was released on August 21. 2021. This amendment was introduced with a new rule i.e. Rule 9D which possessed the details of the manner that was prescribed for the computation of the taxable interest. The taxable interest will be calculated as per the following:

1. At first, two separate accounts will be maintained from the previous year(2021-2022) in order to determine the below mentioned types of contributions that can be made by an individual:
   1. Taxable Contribution
   2. Non-Taxable Contribution
2. Post determining the taxable and non-taxable contributions, the interest that is gained in the taxable interest will be liable for taxation when the interest is above the specified threshold limit.

Taxable Interest is the total of the listed items:

•  Taxable contributions are the contributions that are made by an individual in the PF account in the previous year (2021-22) and in the subsequent previous years over the specified limit.
• Interest is gained on the contribution as stated above.

Non-Taxable Interest is the total of the items listed below:

• The PF account’s closing balance on March 31,2021.
• Interest gained according to the above mentioned contribution.
• A contribution that is made by an individual in the PF account which was not a part of the taxable income during last year(2021-22) and successive last years.

Threshold Limits means:

• When the contribution that is made to the PF account does not contain the contribution of the employer, the threshold limit will be Rs. 5 Lakhs.
• In all other cases, the threshold limit will be Rs. 2.50 Lakhs.