New Delhi: Subscribers of Employees' Provident Fund and Voluntary Provident Fund (VPF) who have PF contribution of over Rs 2.5 lakh per financial year will now have two separate PF accounts.
Finance Minister Nirmala Sitharaman had announced, in this year's budget, that PF contribution of more than Rs 2.5 lakh in a fiscal will be taxable. In line with the decision, recently, the Central Board of Direct Taxes (CBDT) notified the rules for taxation of the interest on the excess EPF contributions. (Also read: 8.5% interest to be credited before Diwali)
"For the purpose of calculation of taxable interest under sub-rule (1), separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person," it said.
What does this mean and what are the important dates?
What this means is that till FY22, all contributions made in PF accounts so far, including contribution of upto Rs 2.5 lakh made in FY22, will be placed in one account where no tax will be levied as has been the practice with the PF, where contribution, interest, and withdrawal, all are tax free.
But another PF account will be opened for each subscriber in FY22, where contribution of over Rs 2.5 lakh made in the current year and subsequent years will be placed. This will taxable account meaning interest earned on this contribution would be subject to applicable tax.
These rules will be effective from April 1, 2022.
Rationalisation of Tax-free Income on Provident Funds
Tax experts are of the view that the notification has ended the ambiguities in the matter and provide convenience of calculation of interest.
This decision is aimed at stoping high net worth individuals to misuse a welfare facility and earn wrongfully tax-free income as assured interest return. Interest portion is calculable on a year-to-year basis just like bank interest. Tax payers will be required to include the annual income from contribution beyond Rs 2.5 lakhs into their PF accounts while filing their returns.
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