How Is Income Tax On GPF Interest Is Calculated?

As per the income tax law, the interest accrued on General Provident Fund (GPF) where the the contribution during the Financial year is more than Rs 5 lakh is taxable, CBDT implemented Rule 9 of Income Tax Rules which talks about the method of calculating the interest on taxable and non-taxable component of contribution. 

Under this rule, you should have two GPF accounts. If you earn a GPF contribution above Rs 5 lakh in a single financial year, it should be deposited in your second account. Thus, interest earned on your first GPF account will be free from taxation. 

Here’s more on the taxability of GPF interest!
 

General Provident Funds (GPF)

The general Provident Funds is a savings -cum retirement scheme specific for central and state government employees excluded from NPS. Non-government employees can not contribute to GPF; this is the basic difference between GPF and PPF. Under this scheme, employees can contribute part of their income monthly until retirement, death or cessation of service. The GPF is a safe, government-backed and tax-efficient scheme for government employees to promote financial security and savings among government employees.

Under the old regime, salaried employees could claim a deduction for their contribution to GPF under section 80C of the Income Tax Act while filing an ITR.

More Features of GPF are given below:

• Employees can make contributions on a monthly basis, but the contribution amount must be at least 6% of monthly income and can be up to 100% of monthly income. 
• Government employees not subscribed to the National Pension Scheme (NPS) are eligible for the GPF scheme. Employers can not contribute to this scheme.
• Employees can change the contribution amount of choice within the permitted limit once a year.
• Employees can withdraw their corpus for personal or financial reasons before retirement or cessation of service and repay the amount in instalments. This scheme matures on retirement, cessation of service, or death of the employee.
• Contribution made to GPF is applicable for deduction under section 80C of income tax. The interest and maturity amount is tax-free. However, interest earned on contributions above Rs. 5 lakh during the financial year is taxable.
• The government changes the interest rate on GPF from time to time. For the financial year 2024-2025, the interest rate is 7.1% P.A.

How to Calculate Taxable and Non-taxable Interest under GPF?

Under Section 10(11) and Section 10(12) of the Finance Act of 2021, GPF contribution above Rs 5 lakh in the previous year is not exempted from tax applicability. Thus, the Central Board of Direct Taxes (CBDT) mandated two GPF accounts for every employee. 

As per the Notification No. 95/2021 of August 31, 2021, you need to maintain a taxable and non-taxable GPF account. It will help in seamless tax calculation and help you get GPF exemption in the income tax section.

Here’s a better interpretation of the taxable and non-taxable interest account:

• Taxable Contribution Account

     Following are included in the account:

• Contribution made by the employee in excess of Rs. 5 lakh for the FY 2023-24 and subsequent years.
• Interest accrued on the above balance.
• Non-taxable Contribution Account

     Following are included in the account:

• Closing balance of the contribution as on 31-03-2024 
• Contribution made by the employee which is not included in the taxable contribution account.
• Interest accrued on the above two balances.

Understand Taxable and Non-taxable Interests with an Example

Let’s assume Mr. Gupta contributes Rs 55,000 to his GPF account each month. Thus, the taxable and non-taxable interest on GPF within Rs 5 lakh threshold will be calculated as follows:

Maintainable Accounts in GPF by the Authorised Department - Explained

Here's a detailed interpretation of the accounts that need to be maintained in GPF: