No tax on interest from Provident Fund contribution up to ₹5 lakh under one condition. Do you know?

Interest income from Provident Fund (PF) contributions up to ₹2.5 lakh in a financial year is tax-free. Any interest income on contributions above the ₹2.5 lakh limit becomes taxable.

While the above provision is widely known, there is a condition under which interest income on provident contribution up to ₹5 lakh can attract nil tax. However, this benefit is not available to private sector employees. If you are not aware of this rule, then read on to understand.

First, the popular rule:

As per the Finance Act 2021, no tax exemption is allowed on interest income realised from contributions above ₹2.5 lakh by the employee towards a recognised and statutory provident fund, such as the Employees Provident Fund (EPF).

The ₹2.5 lakh tax-free contribution limit applies only to the contribution made by the employee in any previous year on or after April 1, 2021.

Further, the interest income from the employee's contribution above ₹2.5 lakh is taxed under the head "income from other sources".

So, when does the ₹5 lakh limit come into play?

Well, the limit of ₹2.5 lakh increases to ₹5 lakh in case of a recognised provident fund where the employer is not making any contribution.

In EPF, both employer and employee contributions are mandatory. Is there any provident fund in which only the employee contributes? You may ask.

Yes, there are such funds. For example, the Government Provident Fund (GPF), where no contribution is made by the employer, i.e. the Government. To make this possible, the Central Board of Direct Taxes (CBDT) had notified Rule 9D in 2021 to calculate the taxable portion of the interest related to contributions over ₹2.5 lakh or ₹5 lakh, as the case may be.

However, GPF applies only to a small section of Government employees. It doesn't benefit private sector employees, who are generally covered by EPFO.