Rule 277: Taxable interest on provident fund contributions above the threshold
Rule 277 explains how to compute taxable interest under Schedule II [Table: Sl. Nos. 3 and 4. C] on contributions to a provident fund or recognised provident fund above the threshold. Taxable interest is the interest accrued in the "taxable contribution account" during the tax year. Separate taxable and non-taxable accounts must be kept from tax year 2021-2022. The threshold is Rs 5,00,000 where the employer makes no contribution, and Rs 2,50,000 in other cases.
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Bare law
Rule 277 - Calculation of taxable interest relating to contribution in a provident fund or recognised provident fund, exceeding specified limit
(1) Taxable interest under Schedule II [Table: Sl. Nos. 3 and 4. C] to the Act shall be computed as the interest accrued in the taxable contribution account during the tax year.
(2) For the purpose of calculation of taxable interest under sub-rule (1), separate accounts within the provident fund account shall be maintained during the tax year 2021-2022 and all subsequent tax years for taxable contribution and non-taxable contribution made by a person.
(3) For the purposes of this rule,—
(a) non-taxable contribution account shall be the aggregate of the following:—
(i) closing balance in the account as on 31st March, 2021;
(ii) any contribution made by the person in the account during the tax year 2021-2022 and subsequent tax years, which is not included in the taxable contribution account; and
(iii) interest accrued on sub-clauses (i) and (ii), as reduced by the withdrawal, if any, from such account;
(b) taxable contribution account shall be the aggregate of the following:—
(i) contribution made by the person in a tax year in the account during the tax year 2021-2022 and subsequent tax years, which is in excess of the threshold limit; and
(ii) interest accrued on sub-clause (i), as reduced by the withdrawal, if any, from such account;
(c) "taxable interest" means the income by way of interest accrued during the tax year which is not exempt from inclusion in the total income of a person; and
(d) the threshold limit for the purposes of clause (b)(i) shall mean,–
(i) ₹500000 where no contribution is made by the employer of such person; and
(ii) ₹250000 in other cases.
Rule breakdown
Two accounts: Rule 277(2) and (3)
Non-taxable account: closing balance on 31 March 2021, plus contributions from 2021-22 not in the taxable account, plus interest on these, less withdrawals.
Taxable account: contributions in a tax year above the threshold limit from 2021-22, plus interest on them, less withdrawals.
Threshold: Rule 277(3)(d)
Rs 5,00,000 where no contribution is made by the employer.
Rs 2,50,000 in other cases.
Taxable interest: Rule 277(1) and (3)(c)
Interest accrued in the taxable contribution account during the tax year.
Defined as interest accrued during the tax year that is not exempt from total income.
Key takeaways
Separate accounts
Taxable and non-taxable accounts from 2021-22.
Thresholds
Rs 5 lakh without employer contribution; Rs 2.5 lakh otherwise.
What is taxed
Only interest on the taxable contribution account.
Practical checklist
- Ask your PF trust for the split between taxable and non-taxable accounts.
- Track your own contribution each tax year against the threshold.
Avoid
- Do not treat interest on the 31 March 2021 balance as taxable under this rule; it sits in the non-taxable account.
FAQs
What is the threshold if my employer also contributes?
Rs 2,50,000 (Rule 277(3)(d)(ii)).
What is the threshold if there is no employer contribution?
Rs 5,00,000 (Rule 277(3)(d)(i)).
Is the whole PF interest taxable once I cross the threshold?
No. Only interest accrued in the taxable contribution account is taxable (Rule 277(1)).
Glossary
- Taxable contribution account
- Account of contributions above the threshold and interest on them (Rule 277(3)(b)).
- Non-taxable contribution account
- Account of the 31 March 2021 balance and contributions within the threshold, with interest (Rule 277(3)(a)).