Direct Tax Alert

Taxability of interest on Provident Funds

September 14, 2021


Prior to the amendments brought in vide Finance Act, 2021 (FA 2021), interest accrued/ received on the contributions made  to statutory provident fund, recognised provident fund and the public provident fund was exempt from tax at the time of accrual as well as withdrawal of the accumulated balance. The Government vide FA 2021 introduced a new provision that makes interest accrued in the provident funds’ account taxable.

The idea is to rationalise tax exemption for the income earned by high income employees. The Government noticed that some employees are contributing a huge amount to these funds. Thus, to cut down the wings of this practice, FA 2021 has amended section 10(11) and section 10(12) to provide that exemption shall not be available for the interest income accrued during the previous year on the recognised and statutory provident funds in the account of the person to the extent it relates to the contribution made by the employees in excess of INR 250,000 in a previous year. However, if such person has contributed in a fund in which there is no contribution by the employer, the limit of INR 250,000 shall be increased to INR 500,000. The amount of such interest income shall be computed as per the prescribed rules.

Method of computation of taxable interest

  • The Central Board of Direct Taxes (CBDT) has notified Rule 9D vide Notification No. 95/2021 dated 31 August 2021 for calculation of the taxable portion of interest pertaining to the contributions made to provident funds in excess of threshold limit.
  • The Rule provides that separate accounts within the provident fund account shall be maintained during the previous year 2021-22 and onwards for the taxable and non-taxable contributions made by the person.
  • Taxable contribution shall be the aggregate of contribution made by the person in the account after 1 April 2021, which is in excess of the threshold limit (i.e. INR 250,000/ INR 500,000, as applicable) and interest accrued on it, as reduced by withdrawals, if any.
  • Non-taxable contribution shall be the aggregate of:
    1. Closing balance in account as on 31 March 2021,
    2. Any contribution made by the person on or after 1 April 2021 which is not included in taxable contribution account, and
    3. Interest accrued on above,
    4. as reduced by withdrawal, if any.


The prescribed Rule removes ambiguity and provides clarity on the mechanism to compute taxable portion of interest accrued/ received on contributions made to provident funds.

Article contributed by:

Mehul Sahni

Senior Manager -  Taxation

Pooja Shrivastav

Assistant Manager -  Direct Tax

MBG Corporate Services

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