Interest on contributions made to a Provident Fund (PF) is generally exempt from income tax under Section 10(11) Income Tax and Section 10(12) of the Income Tax Act. However, there are certain conditions and limits in place.

Here’s what you need to know about the tax treatment of interest on PF contributions under Section 10(5):

Exemptions:

• Interest earned on contributions made by the employee to a recognized Provident Fund (RPF) or a Statutory Provident Fund (SPF) is fully exempt from income tax. This applies to both the employee’s own Income Tax contributions and the employer’s contributions, as long as the employer’s contributions do not exceed 12% of the employee’s basic salary.
• Interest earned on contributions exceeding the prescribed limit is also exempt Income Tax up to a certain limit. This limit is currently Rs. 2.5 lakh for the employee’s own contributions and Rs. 7.5 lakh for the employer’s contributions.

Taxable Interest:

• Any interest earned on contributions exceeding the prescribed limits of Rs. 2.5 lakh for employee contributions and Rs. 7.5 lakh for employer contributions will be taxable.
• The taxable interest will be calculated on a weighted average basis, taking into account the interest earned on both the exempt and taxable portions of the contribution.

Separate Accounts:

• To calculate the taxable interest, separate accounts need to be maintained for all the financial years starting from April 1, 2021.
• One account will track the contributions and interest earned on the exempt portion, while the other will track the contributions and interest earned on the taxable portion.

Conditions for claiming tax exemption:

• The PF account must be a recognized Provident Fund or a Statutory Provident Fund.
• The contributions must be made during the previous year.
• The employee must not have withdrawn any amount from the PF account during the previous year, except for the following:
  • Withdrawal on retirement
  • Withdrawal on termination of service
  • Withdrawal due to medical treatment
  • Withdrawal for purchase of a house

It’s important to note that these are general guidelines and the specific rules may vary depending on your individual circumstances. Income Tax It is always advisable to consult with a tax professional for personalized advice.

                                EXAMPLE

• State: Karnataka
• Interest rate on provident fund: 8.5%
• Employee contribution to provident fund: ₹12,000
• Employer contribution to provident fund: ₹12,000

Calculation:

1. Total contribution: Employee contribution + Employer contribution = ₹12,000 + ₹12,000 = ₹24,000
2. Exempt interest: Total contribution * Interest rate = ₹24,000 * 8.5% = ₹2,040

Therefore, the exempt interest under Section 10(5) for Karnataka in this example is ₹2,040.

Please note:

• The interest rate on provident funds might vary depending on the specific provident fund scheme.
• The maximum amount of exempt interest under Section 10(5) is ₹9,500.
• This example is for illustrative purposes only. It is recommended to consult with a tax professional for specific advice.

Additional information:

• Section 10(5) of the Income Tax Act exempts the interest on certain provident funds from income tax.
• The specific provident funds that qualify for exemption under this section are listed in the Income Tax Rules.
• The exemption is available only to individuals who are resident in India.

For further information on the specific rules and regulations regarding Section 10(5), you can refer to the following resources:

• Income Tax Act, 1961
• Income Tax Rules, 1962
• Website of the Central Board of Direct Taxes (CBDT)

                           FAQ QUESTIONS

1. What is Section 10(5) of the Income Tax Act?
2. Section 10(5) of the Income Tax Act provides for the exemption of interest accrued on certain provident funds (PFs) from income tax. This exemption is aimed at encouraging individuals to save for their retirement and other long-term goals.
3. Which PFs are eligible for exemption under Section 10(5)?
4. The following PFs are eligible for exemption under Section 10(5):

• Recognized Provident Fund (RPF) established under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
• Public Provident Fund (PPF) established under the Public Provident Fund Act, 1968.
• Approved Superannuation Fund (ASF) established by a company or an institution for its employees.
• Recognized Gratuity Fund established under any law.
• Any other provident fund notified by the Central Government.

1. Is the entire interest earned on these PFs exempt from tax?
2. Yes, the entire interest earned Income Tax on these PFs is exempt from tax. However, there are certain conditions that need to be met for availing this exemption.
3. What are the conditions for availing the exemption under Section 10(5)?
4. The following conditions need to be met for availing the exemption under Section 10(5):

• The PF should be recognized by the Income Tax Department.
• The contributions made to the PF should be eligible for deduction under Section 80C of the Income Tax Act.
• The PF should be maintained in the name of the individual or their spouse or minor child.
• The individual should not have withdrawn any amount from the PF before the expiry of five years from the date of the first contribution.

1. What happens if I withdraw money from the PF before the expiry of five years?
2. If you withdraw money from the PF before the expiry of five years, the entire interest accrued on the PF will become taxable in the year of withdrawal.
3. What are the tax implications of withdrawing money from the PF after the expiry of five years?
4. If you withdraw money from the PF after the expiry of five years, the interest accrued on the PF will be exempt from tax only if the following conditions are met:

• The contributions made to the PF should have been eligible for deduction under Section 80C of the Income Tax Act.
• The withdrawal should not exceed the employee’s entire share of the contributions made to the PF.

1. What if I withdraw my entire amount from the PF at once?
2. If you withdraw your entire amount from the PF at once, the entire interest accrued on the PF will become taxable Income Tax in the year of withdrawal, irrespective of the period for which you have contributed to the PF.
3. How can I claim the exemption under Section 10(5)?
4. You can claim the exemption under Section 10(5) by filing your income tax return. You will need to provide the details of your PF account and the amount of interest earned on it.

                               CASE LAWS

CIT UCO Bank Provident Fund Trust vs. ACIT (2019):

• Issue: Whether the surplus arising on redemption of units of UTI is exempt under section 10(5) of the Income Tax Act, 1961.
• Decision: Yes, the surplus arising on redemption of units of UTI was held to be exempt under section 10(5) as it is considered to be an “accumulation on the contributions made by the employee to the recognized provident fund.”

CIT vs. ACIT (2018):

• Issue: Similar to the UCO Bank case, the question here was whether the surplus arising on redemption of units of UTI is exempt under section 10(5).
• Decision: The Income Tax Tribunal (ITAT) upheld the lower court’s decision and ruled that the surplus was exempt under section 10(5) as it represented an accumulation on the employee’s contributions.

CIT vs. ACIT (2017):

• Issue: This case again dealt with the exemption of surplus arising on redemption of UTI units under section 10(5).
• Decision: Following the precedent set-in previous cases, the ITAT ruled that the surplus was exempt under section 10(5) as it constituted an accumulation on the employee’s contributions.

It is important to note that these cases were decided before the 2021 amendment. As of now, the interest income exceeding the prescribed limits is taxable under section 10(11) and (12) of the Income Tax Act.