My PF used to be entirely tax-free. Which parts of it are taxable now, and from when?
Two separate caps bite. Interest on your own contributions above Rs 2,50,000 a year (Rs 5,00,000 where the employer contributes nothing) is taxable, for contributions made on or after 1 April 2021. And employer contributions to PF, superannuation and NPS together above Rs 7,50,000 a year are a taxable perquisite, from AY 2021-22, along with the return earned on that excess.
A recognised provident fund is still the most tax-favoured thing on a salary slip: your contribution feeds s.80C, the employer's contribution is outside your income up to a limit, the interest compounds untaxed up to a limit, and Rule 8 of Part A of the Fourth Schedule keeps the whole accumulated balance out of total income when you withdraw after five years of continuous service. Two limits were bolted on in successive Finance Acts, and they work in completely different ways.
The first limit is on the employee's side. The provisos to s.10(11) and s.10(12) say that interest accruing on the employee's own contributions above Rs 2,50,000 in a financial year is no longer exempt. Where the employer makes no contribution to the fund at all — which in practice is the General Provident Fund of government employees — the threshold is Rs 5,00,000. This applies to contributions made on or after 1 April 2021, so FY 2021-22 onwards, and it catches voluntary provident fund top-ups, because VPF counts towards the same threshold.
Rule 9D, notified by Notification 95/2021 dated 31 August 2021, tells the fund how to keep score. The fund splits your account in two: a non-taxable contribution account holding the balance as it stood on 31 March 2021 plus each year's contributions up to the threshold, and a taxable contribution account holding the excess. Interest is computed separately on each. Only the interest in the taxable account is taxed, as income from other sources at your slab rate. EPFO deducts TDS on it at 10% for a resident with a valid PAN, with a Rs 5,000 floor, and 20% where the PAN is not valid; the deduction machinery started with EPFO's circular of 6 April 2022.
The second limit is on the employer's side and is a perquisite, not an exemption cap. Section 17(2)(vii), effective from AY 2021-22, says that where the employer's contributions to a recognised provident fund, an approved superannuation fund and the National Pension System together exceed Rs 7,50,000 in a previous year, the excess is taxable salary in the employee's hands in that year. Section 17(2)(viia) then taxes the annual accretion — the interest, dividend or similar return — attributable to that excess, so the same money is not simply parked and left to grow untaxed.
Rule 3B, notified by Notification 11/2021 dated 5 March 2021, gives the formula for the accretion: TP = (PC/2) x R + (PC1 + TP1) x R, where PC is the current year's excess contribution, R is the fund's rate of return worked out as annual income divided by the average of opening and closing balances, and PC1 and TP1 carry forward the earlier years' excesses and taxed accretions. It is a genuinely fiddly computation and it is the employer's job, not yours, to get it into your Form 16.
The Rs 7,50,000 cap and s.80CCD(2) are separate questions and people conflate them. Section 80CCD(2) gives you a deduction for the employer's NPS contribution — 14% of salary for government employees and 10% for others under the old regime, and 14% for everyone under the new regime. That deduction does not undo s.17(2)(vii): if the combined PF, superannuation and NPS contributions cross Rs 7,50,000, the excess is still perquisite income even though a slice of the NPS component is deductible.
Finally, if you break the fund early, s.192A applies 10% TDS on premature withdrawal, with no deduction where the payment is Rs 50,000 or less, and no deduction at all where you have completed five years of continuous service or the balance is simply transferred to a new employer's fund.
PF interest used to need no thought at all, and for most people it still does not — the thresholds only bite on high salaries and heavy VPF. But when they do bite, the tax arrives as an entry in Form 26AS you did not expect, and the employer perquisite under s.17(2)(vii) is added to salary by payroll without any cash reaching you. Both are easy to under-report and both are fully visible to the department.
I filed my return under the new regime by default, then filed a revised return within time switching to the old regime and claiming my exemptions and Chapter VI-A deductions. The CPC has processed it under the new regime saying the regime cannot be changed in a revised return. Can it?
My client's EPF interest certificate now shows a taxable interest figure and the return utility is picking it up. Where does that come from, is the threshold two and a half lakhs or five lakhs for him, and from when does it apply?
My client's Form 16 now shows a perquisite for the employer's contribution to the superannuation fund and to NPS. Is there a separate limit for each fund, and what is the extra line for annual accretion?
My client received a payment from a former employer that is not gratuity, not retrenchment compensation and not under any VRS. The Assessing Officer says it is profits in lieu of salary. What exactly does s.17(3) cover, and what does it not?
I left my job after three years and withdrew my EPF balance. The trustees deducted tax and I have no Form 16. On what was the deduction made, and what happens because I had not given my PAN?
My client is in the default regime under s.115BAC. Can he still claim the extra fifty thousand for NPS, and what is the ceiling on his employer's NPS contribution now?
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