Tax on Provident Fund: Know how PF contributions and interest will be taxed.

Tax on Provident Fund
There has been an alarming news recently that PF is being taxed with income. Employees Provident Fund is treated by many as a prime long term investment tool to the common man. This rumour has incited many to withdraw the amount from the PF account too. 

The amount of deposit in Employee Provident Fund is tax free. Opening balance amount in the PF account (previous years deposits and it's  Interest earned so far) is totally exempted for  Income tax calculation. More over  current periods interest over this accumulated balance is also tax free.  

Interest is attracted  on the current years investment's interest portion , only if the the investment exceeds the ceiling fixed by the income department

The public servant including in an aided school, can get the privilege of investing upto 5 lakhs including arrear credit in a financial year. Its interest is not taxable. 

In the case of EPF, where the contribution from the employer is also there, the interest free tax deduction is only Rs. 2.5 lakhs instead of 5 lakhs. 

Its explained with an example here Assume that the PF balance of Mr.X as on 31/03/2021 is Rs 15,50,000 including PF interest. He has deposited Rs 5,50,000 in PF earlier in the current year along with the credit of arrear for the financial year 2020-21. If Mr. X is a govt servant and the interest rate is 8.5%, then the interest that comes under the tax limit for the financial year 2020-21 and the interest that exceeds the tax limit can be calculated as follows.Tax on Provident Fund

 Here Mr.X should add the gross income to the salary income plus 4250 under the heading ‘income from other sources' while calculating the tax for the financial year 2021-22. 

How is the Interest on PF Taxed ?

Help file Prepared by Sri.Babu Vadakkumchery, Principal, KNM VHSS, Vatanappally, Thrissur (alert-success)

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