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1. Section 10(12) provides that accumulated balance becoming due and payable to employee from Recognized Provident fund (RPF), which is not taxable as per rule 8 of part A of Schedule IV of Income Tax Act, shall be exempt

2. Finance Act 21, appended a proviso to this section to the effect that said provision will not be applicable in respect of Interest accrued in previous year on annual employee contribution in excess of Rs. 2.50/5.00 lacs (Prescribed Amount). The Interest is to be computed in a manner prescribed by rule 9D of Income Tax Rules.

3. The issue under consideration are two fold:-

  • Whether Annual Interest (Taxable Interest) accrued in previous year on employee contribution in excess of the prescribed amount is taxable in PREVIOUS YEAR itself or will it be taxable at time accumulated PF balance becomes due or payable to an employee?
  • Whether any TDS is to be deducted on such taxable interest and if yes, then when and at what rate?
Taxability of Interest Accrued on Employee Contribution to Recognized Fund


A. Existing (Pre-Amended) Taxability in connection with RPF

Legal Frame work of Recognized Provident Fund

  • It needs to be organized as Trust and registered under Income Tax Act, as per Part A of Fourth Schedule to Income Tax Act, 1961
  • The Income received by trustee of Recognized Provident Fund is exempt u/s 10(25)

1. Employer's Contribution to Employee Provident Fund

  • Employer's Contribution in excess of 12% of Salary – It will be taxable under head Salary in the year in which such excess contribution is made by Employer (Section 17(1)(vi) of Income Tax Act)
  • Employer Contribution upto 12% of Salary- If aggregate contribution to RPF, NPS, Superannuation fund exceeds Rs. 7.50 lacs per year, the excess will be taxable as per perquisite under the head Salary ( Section 17(1)(vi))

2. Interest on Balance (Employee and Employer Contribution) in RPF

a. Interest rate is upto prescribed Rate – Nothing is taxable in the hands of employee on annual basis, the reason is as under;-

  • RPF is organized as Trust
  • The income of trust is taxable either in the hands of trustee or in the hands of beneficiaries.
  • The income of Trustee of RPF is made exempt u/s 10(25). Since income of RPF is made exempt, the annual interest credited to employee account is also not taxable.

b. Interest rate is exceeding the prescribed rate – The excess interest so calculated is taxable under the head salary in the year in which such interest is credited to employee account. ( Section 17(1)(vi) of Income Tax Act)


3. Accumulated Balance in RPF due and payable (Balance payable to employee, when he ceased to be employee of employee)

  • Complying with conditions stated in Rule 8 of Part A of Fourth Schedule ( Continuous employment for 5 years etc.) – Such balance is not taxable as per section 10(12) of Income Tax Act
  • Not Complying with Condition Stated in said Rule – The accumulated balance become taxable and the taxability of such balance is worked as if the provident fund was unrecognized.

4. TDS on taxable income relating to RPF

  • Contribution by employer in excess of 12% or Interest in excess of Prescribed rate - Such amount is taxable under the head Salary on annual basis and TDS is deducted thereon u/s 192.
  • Accumulated balance taxable (not complying with Rule 8) - TDS on such accumulated balance is deducted @10% u/s 192A

Thus under pre-amended scenario, if interest rate is within prescribed rate, there is no taxability of Interest on annual basis, though such amount may be made taxable at the time when accumulated balance is received, if Rule 8 conditions are not complied with.


Amendment by Finance Act 2021

1. In the entire gamut of taxability in connection with RPF, Finance Act 2021 has just made an amendment in section 10(12) and same is reproduced as under:-

"Section 10 - 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-

(12) 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;

Following provisos shall be inserted in clause (12) of section 10 by the Finance Act, 2021, w.e.f. 1-4-2022:

Provided also 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 :

Provided further that if the contribution by such person is in a fund in which there is no contribution by the employer of such person, the provisions of the first proviso shall have the effect as if for the words "two lakh and fifty thousand rupees", the words "five lakh rupees" had been substituted"

2. As per literal interpretation, the above amendment explicitly state that annual interest computed on employee contribution in excess of Rs. 2.50 lacs/5.00 lacs, will not be exempt, when such interest is received at the time accumulated balance of RPF is payable to employee. Further Memorandum to Finance Bill 2021 also does not state that such taxable interest will be taxable on yearly basis.

3. Neither there is amendment in section 15 or 17 or section 56 mandating that annual Interest so computed as per Rule 9D of Income Tax rules will be taxable on annual basis.

4. Further neither section 192 nor 194A has been amended so as provide for yearly deduction of TDS on such taxable interest. Thus there is no need for TDS deduction on such taxable interest on annual basis. Till any further amendment, deduction on such taxable interest will be governed by Section 192A, at the time, when the accumulated balance is paid to employee.

Thus in my view, the annual interest computed on employee contribution in excess of Rs. 2.50/5.00 lacs is taxable only at the time of Accumulated balance is paid to employee (not on annual basis) and there is no need to deduct annual TDS on such Interest Amount.

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Category Income Tax, Other Articles by - MOHIT JAIN