Existing Provident Fund (PF) accounts are likely to be split into two parts under the new income tax laws, starting April 1, for the purpose of calculating taxable and non-taxable interest income in the previous year. This will ease the taxation process on any interest earned on PF contributions, including from Employees’ Provident Fund (EPF) and Voluntary Provident Fund (VPF), beyond a specified threshold limit.
The government has fixed the threshold limit at Rs 2.5 lakh for non-government employees and Rs 5 lakh for government employees. This means that if, say, a non-government employee deposits Rs 5.5 lakh in his PF account, the interest earned on Rs 3,00,000 (beyond the Rs 2.5 lakh limit) will be subject to tax. In case of government employees depositing Rs 5.5 lakh, the interest earned from the excess Rs 50,000 will be subject to tax.
All contributions made by employees until March 31, 2021, will be treated as non-taxable contributions. However, income from contributions in excess of the specified threshold limits made in FY2021-22 will be taxable. Interest will be calculated separately for non-taxable contributions and taxable contributions.
This means that the splitting which is to happen from April 1, 2022, will apply to contributions above the threshold limit made in the previous financial year—between March 31, 2021 and March 31, 2022 too.
Tracking the taxable and non-taxable contributions in the PF account for tax calculation will become easier. “This segregation of PF account will provide a convenient way for the taxpayers to calculate their tax and clearly bifurcate the taxable and non-taxable contribution at their end,” says Harshad Chetanwala, co-founder, MyWealthGrowth.com, an online investment and research platform for mutual funds.
For the implementation of the new tax rules on PF income from employees’ contributions exceeding Rs 2.5 lakh per annum, a new Section 9D has been included under the Income-tax Rules, 1962, according to a notification issued by the Central Board of Direct Taxes in August 2021. The new rules will be applicable from April 1, 2022.
