Taxation

Tax on interest of GPF to be applicable from 1st April onwards

From 1^st April, 2022 onwards, the interest earned on General Provident Fund (GPF) by both the government and non-government employees will not remain exempt anymore from taxation. The Union Finance Minister in her Union Budget 2021 speech had proposed tax on interest of GPF in case the interest earned exceeds the threshold limit.  

What is general provident fund (GPF)?

The General Provident Fund or popularly called as GPF is a type of Public provident Fund (PPF) account which is available for the government employees in India only. GPF allows the government employees to contribute a portion of their salary to the GPF and total account accumulated over the years shall be paid to the employee at the time of his/her retirement.

GPF is one among the three types of provident fund. The other two are Public Provident Fund (PPF) and Employees Provident Fund (EPF). However, the features and benefits of all these Provident Funds vary from each other.          

What does the directive provide?

After the proposals made in the budget of 2021, the amendments were introduced by the Centre in the Income Tax Rules, 1961 prescribing the criteria of calculation of tax on interest of GPF. The directive issued by the Centre in August 2021 specified that the threshold limit is Rupees 5 lakh for the government employees and Rupees 2.5 lakh for the non-government employees.

Recently, the department of revenue has come out with another notification on 15^th February, 2022 which asks the government employees having GPF subscription over Rupees 5 lakh in the Financial Year of 2021-22 to intimate the department about the interest earned by them before salary bills for the month of February 2022 are prepared for deduction of Tax Deducted at Source (TDS) from the pay and allowances.

Who fall in the criteria of tax on interest of GPF?   

In response to the proposal made by the Finance Minister for tax on interest of GPF, amendments were made in Income Tax Rules where Rule 9D was inserted by the Central Board of Direct Taxes (CBDT^[1]) last year. The rules said:

• In case of government employees where the employer is not contributing with a provident fund amount above the threshold limit of Rupees 5 lakh will pay tax on interest of GPF earnings
• In case of non- government employees where the employer is contributing to the provident fund which amounts to more than Rupees 2.5 lakh will have to pay tax on interest earnings made from EPF.

What are the criteria of computation of tax on interest of GPF?  

Two separate accounts will be created within the Provident Fund account for the financial year of 2021-22. This is done for segregating both the taxable and non-taxable contributions.

In the following manner government notification prescribe both the taxable and non-taxable contributions:

Taxable contribution account shall account for the following:

1. Any contribution made by the person in the previous year in the account during the previous year of 2021-2022 and for subsequent previous years and which exceeds the threshold limit
2. Interest accrued on the contributions made in (i).

Non-taxable contribution account shall account for the following:

1. The closing balance in the account on 31^st March 2021
2. Any contribution made by the person in the previous year in the account during the previous year of 2021-2022 and for subsequent previous years and which is not included in the taxable contribution account
3. Interest accrued on amounts mentioned in (i) and (ii).

To make it more clear, all the contributions made by the employees until 31^st March, 2021 shall be non-taxable contributions and all the income generated from the contributions made in excess of the threshold limits made in financial year 2021-22 shall be taxable.

The government notification has specifically prescribed that interest will be calculated separately for both taxable contributions and non-taxable contributions. 

Conclusion

The amendments will kick in from 1^st April, 2022 onwards. These changes were introduced to stop the misuse of benefit to high income earners who were making high deposits in the EPF as the interest on provident fund corpus is tax-free and since no tax is levied at the time of withdrawal, it makes an attractive investment opportunity. The private sector employers have EPFO where the employers also make contributions whereas in the case of government contributions are made from the government end also in the GPF. This move of tax on interest of GPF is likely to benefit government employees more since it is available in those cases where the employers are not making any contributions. 

Read our Article:Provisions related to cash transactions under Income Tax