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Interest received on Employee Provident Fund

Jyoti Malik (ACCOUNTANT) (2644 Points)

25 August 2010

Interest received on Employee's Provident fund is taxable or not?

Thanks in advance ......................

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9 Replies

CA. BIJENDER KR. BANSAL (ACA, B.COM) (8148 Points)
Replied 25 August 2010

As all of you know that, both the employer and employee contribute towards Provident Fund. The contribution made by employees is out of their own income and therefore no question of taxation arises as the entire amount has already been taxed. The contribution by the employer is over and above salary of employee and therefore is seen as income of employee and taxed. The interest earned on the Provident Fund balance is on both employer as well as employee contributions, and this interest is also an income of employee and therefore taxed.

The detailed tax treatment of different kinds of provident funds is little technical. There are rules that govern whether a certain fund will be taxable or not, the technical details of which are shown here.

Tax treatment of Provident Fund can be discussed under two scenarios:

One during continuity of job, and
Upon receipt of accumulated balance of provident fund at the time of retirement or resignation

The table below shows the tax treatment of different kinds of provident funds:

Fund	During Continuity of Job			Upon Retiremen
	Employee's Contribution	Employer's Contribution	Interest on Provident Fund	Repayment of sum on retirement, resignation or termination
RPF	Deduction under Section 80C is available.	Exempt upto 12% of Salary. Thus Contribution made by employer exceeding 12% shall be added to employee's salary Income.	Exempt upto 9.5%. Interest exceeding 9.5% shall be added to employee's Salary Income.	Nothing is taxable subject to following conditions: 1. Employee left the job after five years of service OR 2. Where Period of service less than 5 years, the termination is due to ill health, discontinuance of business of employer. OR 3. here on re-employment, the balance in R.P.F is transferred to R.P.F with new employer. [For the purpose of computing 5 years period, Period of services rendered with previous employer shall also be included.] If none of the above conditions are satisfied then: 1. The amount not taxed earlier shall be taxed in the same manner as URPF, given below. 2. Any tax concession (e.g. 80C) availed by assesses for contribution to RPF shall now be withdrawn.
URPF	No deduction under section 80C available	Any amount of contribution is not taxable	Not taxable	Sum received on retirement/ termination comprise of following: Employer's Contribution and interest there on: Taxable as Salary Income. Employee's own Contribution : It is not taxable. Interest on employee's contribution: Taxable as income from other sources.
SPF	Deduction under Section 80C is available.	Fully Exempt	Fully Exempt	Fully Exempt
PPF	Assessee / Employee can make contribution to PPF, No concept of Employer’s Contribution. Deduction under section 80C available on contribution made.			Amount received (including interest) is Fully Exempt.

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Jyoti Malik (ACCOUNTANT) (2644 Points)
Replied 25 August 2010

Thanks sir

Ashok J (CA Final) (880 Points)
Replied 25 August 2010

Sir You said under RPF interest exceeding 9.5% is taxed as salary income. We were thought only interest on EMPLOYER'S CONTRIBUTION IS TAXED AS SALARY AND INTEREST ON EMPLOYEE'S CONTRIBUTION IS TAXED AS INCOME FROM OTHR SOURCE. PLEASE CLARIFY....THANK YOU...

CA. BIJENDER KR. BANSAL (ACA, B.COM) (8148 Points)
Replied 25 August 2010

About interest the taxable potion will be excess of Interest credited to the balance of RPF over a rate of interest to be announced by the Government from time to time.

At present Interest rate declared by govt is 9.5%

CA. BIJENDER KR. BANSAL (ACA, B.COM) (8148 Points)
Replied 25 August 2010

Thanks may be conveyed by TAB Thanks User below User ID.

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Ashok J (CA Final) (880 Points)
Replied 25 August 2010

Sir actually my question is...

Interest received on PF has two components.

1. Interest on Employer's contribution and

2. Interest on Employee's contribution.

Are both taxable under the head SALARY ONLY if interest rate exceeds 9.5%??

CA. BIJENDER KR. BANSAL (ACA, B.COM) (8148 Points)
Replied 25 August 2010

A- Taxable Portion of Annual Accretion to RPF [ Sec. 17 (1)(vii)]

“That portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund as consists of :

(a) Contribution made by the employer in excess of 12% of the salary of the employee ; and

(b) Interest credited on the balance to the credit of the employee is so far as it exceeds the amount allowed at a rate exceeding such rate as may be fixed by the Central Government in this behalf by notification in Official Gazette, shall be deemed to have been received by the employee in that previous year and shall be included in the total income for that previous year and shall be liable to income-tax.

The above-mentioned rule makes it clear that any contribution by employer to RPF in excess of 12% of employee’s salary is to be added in salary.

About interest the taxable potion will be excess of Interest credited to the balance of RPF over a rate of interest to be announced by the Government from time to time.

To simplify the above discussion it can be put in the following manner :

Taxable annual accretion will consist of :

(a) Excess of employer’s contribution to Recognised Provident Fund over 12% of employee’s salary and

(b) Excess of interest credited to RPF over interest calculated at prescribed rate ( i.e. 9.5%) of the balance standing to the credit of employee.

i.e in nut shell

Employer Contribution plus Interest on Employer's Contribution is under the head salary

Interest on Employee's Contribution is under the head income from other source.