Interest received on Employee Provident Fund

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:

Thanks sir

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...

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%

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

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%??

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.

Agree with Mr.Bijendra

what is the prescribed rate to calculate tax while exceeding 12% to the contibution to RPF..