After it was declared in the Union Budget 2021-22 that the interest earned on Provident Fund contributions above Rs 2.5 lakh in a financial year will become taxable, people are concerned whether the Rs 2.5 lakh limit will be applicable on GPF (General Provident Fund) and CPF (Contributory Provident Fund) also.
It’s also a matter of concern whether PPF (Public Provident Fund) contributions will also be taken into consideration while calculating the total amount of contribution.
“With respect to PPF contributions, the above provisions may not be relevant as the PPF regulations itself caps the maximum contribution per year to Rs 1,50,000,” said Dr. Suresh Surana, founder, RSM India, adding, “Further with respect to the GPF contributions, it is notable that the CBDT Chief had clarified that the said amendment provisions would be applicable to government employees covered under the GPF. However, there is no clarity with respect to the contributions to the Contributory Provident Fund (CPF).”
“The intent from the memorandum to the Finance Bill 2021 seems to be cover employees who are contributing huge amounts to the provident fund account. However, the amendment made under section 10(11) and 10(12) wherein the interest on PF was exempted, it seems covers all contributions to provident fund,” Dr. Surana further said.
Talking on PPF contributions, Gopal Bohra, Partner, NA Shah Associates, said, “As per the budget proposal, interest accrued to a taxpayer on contribution made on or after April 1, 2021 to PF or RPF (Recognised Provident Fund) or PPF account in excess of Rs 2,50,000 shall be taxable. The above provision is also applicable on interest accrued on PPF contribution. However, under the provision of PPF Scheme, 1968 a person cannot contribute in excess of Rs 1,50,000 per annum, therefore, the proposed provision is not relevant in respect of interest accrued on PPF.”
But in case a person contributes Rs 1.5 lakh in PPF and his/her monthly contribution to PF is Rs 10,000 or the annual contribution is Rs 1,20,000, will the two figures be added to calculate the total contribution? In this case, the total of PPF and PF contribution will be Rs 2,70,000. So, will the interest on excess contribution of Rs 20,0000 be taxable?
Similarly, if a government servant contributes Rs 1.5 lakh in PPF and Rs 2.5 lakh in GPF, will the two figures be added and the interest on excess contribution of Rs 1.5 lakh become taxable?
“On perusal of the proposed amendments, it seems that the intention is to cover contributions made by a person exceeding Rs 2,50,000 in any previous year in that fund. The word ‘that fund’ suggest that the limit of Rs 2.5 lakhs applies to each fund separately and hence EPF / GPF contribution should be not be clubbed with contribution to other funds,” said Dr. Surana.
“So, in case a person contributes Rs 1.5 lakh in PPF and his/her monthly contribution to PF is Rs 10,000 or the annual contribution is Rs 1.2 lakhs, these two figures should not be added to calculate the total contribution and since annual contribution to PF is only Rs 1.2 lakhs the interest accrued thereon will not be taxable and will be exempt. Similar would be the case if the government servant contributes to GPF,” he added.
“The limit of Rs. 2,50,000 p.a. is fund specific and accordingly while computing contribution in excess of Rs. 2,50,000, it will be independent for PPF and PF/GPF,” said Bohra.
So, unless further clarifications are given, it appears that no interest will be charged on the interest on PPF, but the interest on contributions to GPF above Rs 2.5 lakh will be taxable.