Last Updated on February 4, 2021 at 3:03 pm
Finance Bill 2020 has proposed that contribution above 2.5 lakhs by employees into recognised provided funds will be taxed. If an excess contribution is made in one financial year, will it be taxed only in that year or in subsequent financial years until maturity or withdrawal?
While a precise answer to this is not available (clarification is awaited and the article will then be updated) arguments that suggest that such an excess contribution will be taxable every year is presented below. To accommodate these arguments, we have now updated the taxable EPF Interest calculator published earlier today.
Is the interest earned on excess PF contribution (>2.5 lakh) taxable in future financial years also? I was under the impression it is not, but many disagreed with me. These are the exact words of the finance bill 2021 (page 34)
“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
the 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;”
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
This can be interpreted as “interest earned on contributions made above 2.5 lakh in one financial year will be taxed in every subsequent year after 1st April 2021 until maturity”
This means: Suppose a person invested Rs. 50,000 extra in a recognised PF. For 8% PF rate, the interest in the FY year of investment is Rs. 4000 (this depends on which month the amount is invested as shown in the calculator but we will keep it simple here)
In the next financial year if no extra contribution is made, this Rs 50,000 + Rs. 4000 =.Rs. 54,000 will earn an interest of Rs. 4320. If the above interpretation (sentence in red) is correct, then this Rs. 4320 will also be taxable. Interest earned in subsequent financial years will also be taxed. This is an illustration shared by Manmohan Sethumadhavan (Manu). If this interpretation is correct then, users can refer to the additional sheet added to the calculator based on Manu’s sheet. Download the taxable PF contribution calculator (uploaded 3rd Feb 2021) For feedback or bugs write to freefincal AT Gmail.
Manu adds the following points:
- Section 10(11) and 10(12) are clauses exempting some income to be taxable without any limits.
- The words (in the finance bill quotes above) are provisos to both clauses restricting that exemption.
- So, if read together with the proviso, “the “exemption” shall not apply for interest accrued during the previous year (i.e., the concerned FY), if it is related to a contribution in excess of 2.5L in any previous years”.
- Now, in a case of a contribution of 3L, the interest for 50K is taxable. No doubt.
- The next FY, the interest accrued on that 50K should be taxable, as it “relates” to the excess contribution made in some previous year. And it goes on.
- This is not double-taxation, as it is the interest separately accrued in the next FY on some previously accumulated interest, which is the same in case of FDs also.
- So, as per my understanding, there should be 3 separate portfolios for EPF from now on. 1. Employer’s contribution, 2. Employee’s contribution below 2.5L each year, 3. Employee’s contribution above 2.5L each year.
- This should compound separately. And interest accrued every year in portfolio-3 is taxable and the rest is exempt (see illustration pdf linked above).
- According to section 10 of the IT act: In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included
- (11) 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;
- (12) the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule ;
- So, what I understand is 10(12) stands for interest accumulation and 10(11) for withdrawal or superannuation. If a proviso is inserted to both subsections, both incidents are taxable.
In summary, it is quite likely that the interest from the excess contribution will be taxed every financial year, but clarification from the government is necessary.
Update: The Central Board of Direct Taxes has now confirmed that the interest is taxable every year
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)