Rule 277 of Income explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 277 of the Income-tax Rules, 2026 computes taxable provident fund interest as the interest accrued in a separate "taxable contribution account", built from contributions exceeding Rs 2,50,000 a year — or Rs 5,00,000 where the employer contributes nothing. It replaces rule 9D and gives effect to Schedule II to the Act.
The mechanism in one line
Rule 277(1): taxable interest shall be computed as the interest accrued in the taxable contribution account during the tax year. Everything else in the rule exists to define that account.
Sub-rule (2) requires separate accounts within the provident fund account to be maintained during tax year 2021-2022 and all subsequent tax years for the taxable and non-taxable contributions made by a person. The split is therefore historic — a fund that has been running since 2021-22 already carries both accounts, and the 2026 Rules continue rather than restart the exercise.
The two accounts — sub-rule (3)(a) and (b)
| Account | Contents |
|---|---|
| Non-taxable contribution account | (i) the closing balance in the account as on 31 March 2021; (ii) any contribution made by the person during tax year 2021-2022 and subsequent tax years which is not included in the taxable contribution account; and (iii) interest accrued on (i) and (ii), as reduced by withdrawals, if any, from that account |
| Taxable contribution account | (i) contribution made by the person in a tax year during tax year 2021-2022 and subsequent tax years which is in excess of the threshold limit; and (ii) interest accrued on (i), as reduced by withdrawals, if any, from that account |
The entire corpus as it stood on 31 March 2021 sits in the non-taxable account, and so does all interest it earns thereafter. The rule does not tax the old corpus or its yield at any point. Only the excess portion of post-2021 contributions, and the interest that excess earns, ever enters the taxable side.
The two thresholds — sub-rule (3)(d)
The "threshold limit" for the purposes of the taxable contribution account means:
| Situation | Threshold |
|---|---|
| No contribution is made by the employer of such person | Rs 5,00,000 |
| In other cases | Rs 2,50,000 |
The higher limit is the one that applies to a fund the employee funds alone — the classic case being a public provident-type fund or a recognised fund where the employer makes no contribution at all. Where the employer contributes anything, the Rs 2,50,000 limit governs. The test is on the employer's contribution to that fund, not on the size of it.
"Taxable interest" defined — sub-rule (3)(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. The definition is drafted by exclusion, so it tracks whatever exemption the Act confers rather than fixing an independent test.
Why the account-splitting matters more each year
The taxable contribution account compounds. Each year's excess contribution is added to it, and the interest that account earns is itself taxable and stays in the account, earning further taxable interest. A person who crosses the threshold in several consecutive years does not face a flat annual amount — the taxable base grows year on year even if the excess contribution stays constant.
Withdrawals reduce the relevant account, and the rule attributes withdrawals to the account they come from rather than pro-rating them. That makes the fund administrator's record-keeping, not the taxpayer's estimate, the source of truth for both balances.
Worked example
An employee contributes Rs 4,00,000 to a recognised provident fund in tax year 2026-27, and the employer also contributes.
- Because the employer contributes, the threshold is Rs 2,50,000.
- The excess — Rs 1,50,000 — is added to the taxable contribution account.
- The remaining Rs 2,50,000 goes to the non-taxable contribution account, along with the pre-31 March 2021 corpus and everything accumulated in it since.
- Taxable interest for the year is the interest accrued on the whole taxable contribution account — the Rs 1,50,000 added this year and the balance carried forward from earlier years with its accrued interest — not merely interest on Rs 1,50,000.
- If the same employee were in a fund to which the employer contributed nothing, the threshold would be Rs 5,00,000 and nothing would enter the taxable account this year at all.
Compliance checklist
- Establish which threshold applies by checking whether the employer contributes to that fund at all.
- Obtain the taxable and non-taxable account balances from the fund administrator rather than reconstructing them.
- Confirm the 31 March 2021 closing balance is carried in the non-taxable account and has never been disturbed.
- Remember that taxable interest accrues on the whole taxable account, including earlier years' excess and its accumulated interest.
- Attribute withdrawals to the correct account.
- Where a person contributes to more than one fund, apply the rule as the rule is drafted — it operates on contributions and accounts, so confirm the administrator's treatment for each fund.
- Cite rule 277 and Schedule II , not rule 9D.
Common mistakes
- Taxing interest only on the current year's excess contribution. The account is cumulative.
- Applying Rs 5,00,000 where the employer contributes. That limit is only for funds with no employer contribution.
- Bringing the pre-2021 corpus into the taxable account.
- Pro-rating withdrawals across both accounts.
- Assuming the split starts in 2026. Sub-rule (2) runs from tax year 2021-2022.