Computation of Annual Accretion on Employer’s Contribution to Welfare Funds
About The Author
CA. Akansha Shah
akanshashah1997@gmail.com
Background:
As per the Memorandum explaining the provisions in The Finance Bill, 2021:
- Instances have come to the notice where some employees are contributing huge amounts to these funds and entire interest accrued/received on such contributions is exempt from tax under clause (11) and clause (12) of section 10 of the Act.
- This exemption without any threshold benefits only those who can contribute a large amount to these funds as their share.
Scheme of Presentation:
- Existing Provisions
- Amended Provisions
- Queries/ Concerns
- Illustration
As per the section 10 of the Income tax Act, 1961, In computing the total income of a previous year of any person, any income falling within the following clauses shall not be included—
- Clause 11 of section 10: Any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 1925), applies or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette;
- Clause 12 of section 10: the accumulated balance due and becoming payable to an employee participating in a recognized provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule;
From an income-tax perspective – EPF falls under the Exempt-Exempt-Exempt (EEE) taxation regime. This means that no tax is levied at the time of contribution, on accrual of interest and at the time of withdrawal.
In clause (11) of Section 10, the following proviso has been inserted, namely- “Provided that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1st day of April, 2021 and computed in such manner as may be prescribed;”
In clause (12), the following proviso has been inserted, namely- “Provided that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1st day of April, 2021 and computed in such manner as may be prescribed;”
In other words, interest accrued on such portion of the contribution that exceeds ₹ 2.5 lakhs per annum shall be taxable.
Further, in the Finance bill enacted, the threshold of contributions has been increased from ₹ 2.5 to ₹ 5 lakhs per annum for provident funds where there is no contribution made by the employer. Effectively, this change is not going to benefit salaried persons.
- Applicability: This interest taxability shall be applicable only for the contributions (EPF+VPF) made on or after April 1, 2021. The employee’s principal contribution, employer’s contribution, entire interest earned on employers’ contribution, and interest earned by the employee till 31st March 2021 are not taxable
- Taxability: Such interest would be taxable under the head “Income from other sources” as it is not accruing from a source emanating from an employer-employee relationship. This interest income will become part of the total taxable income of the taxpayer. There are no special rates for the taxability of this interest. Hence, such income shall be taxed at the prevailing income tax rates.
- Manner of Taxation: There would be no double taxation and possibly it will work in the same manner as the way interest income on bank fixed deposits is taxed today.
- TDS obligations: Possibly, such interest component shall be subject to TDS under Section 194A at the rate of 10% by the EPFO/ recognized PF Trust. However, prescribed rules are awaited in this regard. As per Section 194A, the payer/deductor shall deduct TDS if the amount of such interest paid or credited or is likely to be paid or credited in a financial year, exceed ₹ 40,000 where the payer is
- Banking company or any bank or a banking institution
- Co-operative society engaged in the business of banking
- Post office (on deposit under scheme framed and notified by Central Government).
- ₹ 5,000 in any other case
- Public Provident Fund (PPF): A cap of ₹ 2.5 lakhs is applicable independently to PPF contribution for claiming interest on PPF. At present, this is not relevant because of the ₹ 1.5 lakh limit on contribution to PPF itself.
- X’s total contribution (including voluntary provident fund) to Employee Provident Fund (EPF) is ₹ 3,50,000 in the FY 2021-22. Assuming the rate of interest on EPF is 8.5% per annum; his tax liability will be calculated in the following manner:-
| Financial Year | Employee’s contribution in EPF in a year
(Rs.) |
Contribution liable for tax on interest (b- 2,50,000) | Interest on the excess contribution
(C*8.5%) |
TDS @ 10% under section 194 A
(10% on d) |
Balance taxable amount (d-e) |
| (a) | (b) | (c) | (d) | (e) | (f) |
| 2021-22 | 3,50,000 | 1,00,000 | 8500 | 850 | 7,650 |
- Subsequent Years: Whether taxable Interest income would be arrived only on considering the current years excess contribution or will be arrived after considering current and previous years excess contribution and Interest accrued on such excess contribution till date. Say, for e.g., Mr. X’s total contribution in FY 2022-23 is ₹ 4,00,000. Excess Contribution for FY 2022-23 is ₹ 1,50,000. His taxable Interest Income for FY 2022-23 would be:
- 5% of (1,50,000) or,
- 5% of (1,50,000 + 1,00,000) or,
- 5% of (1,50,000+ 1,00,000 + 8500)
Rules are yet to be notified by IT department on the same.
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