The Central Board of Direct Taxes (CBDT) has notified new rules that specify how the interest on the provident fund contribution of an employee over a certain threshold will be taxed. As per the notification, issued on August 31, contributions above ₹2.5 lakh in the Employee Provident Fund (EPF) per year will be taxed. In cases where there is no employer contribution in the EPF account, the threshold will be ₹5 lakh a year.
Furthermore, the CBDT has also notified that organisations need to maintain two independent PF accounts. One of the accounts will pertain to taxable contributions, while the other will be for non-taxable contributions starting the ongoing financial year 2021-22.
In order to better understand what the new rules are and how they will make an impact on a tax payer, here are the key updates from this development.
What does the separate EPF accounts mean?
The CBDT notification said that to calculate “taxable interest under sub-rule (1),” separate accounts within the provident fund account have to be maintained during the 2021-22 fiscal and all “subsequent previous years for taxable contribution and non-taxable contribution made by a person.”
What this essentially means is that the non-taxable contribution account will constitute the closing balance of the PF account till March 31, 2021 along with any contribution made by an individual in the current fiscal and in later years within the threshold of ₹2.5 lakh or ₹5 lakh – depending on the employer’s contribution (as explained above).
Meanwhile, the PF contributions above the threshold will be deposited in the taxable account and the interests accrued on it will be taxed, according to Livemint.
Experts said that this step by the central government is an attempt to rationalise the tax exemptions available to high-income employees.
When will the rule come into effect?
The bifurcation of the EPF accounts, as detailed in the previous point, has to be maintained from the ongoing financial year itself. However, the contributions deposited in the taxable account in the EPF above the threshold and which will be taxed, will be applicable from April 1, 2022.
How will it affect the high-income groups?
The Livemint report cited government estimates to mention that nearly 123,000 high-income earners in India are making more than ₹50 lakh per annum.
A government official told Livemint that as per government estimates nearly 123,000 high-income earners in India are making more than ₹50 lakh every year in tax-free interest on an average from the provident fund. Moreover, these high-net worth individuals (HNIs) make up for about 0.27% of the total 4.5 crore EPF account holders in the country.