PF Account New Rule: Contribution Above Rs 2.50 Lakh Set To Be Taxed. Check Details

In Budget 2021, finance minister Nirmala Sitharaman has proposed that PF payments of more beyond Rs 2.5 lakh per year be taxed.

Indian rupee notes with a smart phone calculator and Notepad (Getty Image)

New Delhi: Come April 1, 2022, the interest earned on the provident fund balance will not be exempted from tax. The new PF rule will kick in amid Employees Provident Fund Organisation (EPFO) announcing 8.1 per cent interest rate on employee provident fund (EPF) accumulations in members’ accounts for the 2021-22 fiscal, down from 8.5 per cent in the previous year.

This comes as another blow to PF subcribers because interest accrued on EPF contribution beyond a particular threshold will be taxable, according to the announcement in 2021 Budget.

Earlier, interest on EPF was totally tax-free prior to Budget 2021. Finance minister Nirmala Sitharaman has proposed that PF payments of more beyond Rs 2.5 lakh per year be taxed.

In this regard, the Central Board of Direct Taxes (CBDT) last year issued guidelines sharing details of how the interest on an employee's provident fund contribution that exceeds a specific level will be taxed.

The CBDT notification has clarified that these rules will come into effect from April 1, 2022, according to the Economic Times report. It is to be noted that tax on the interest earned on excess contributions in FY 2021-22 will be payable and it needs to be declared in the next year income tax return filing.

This means that contributions for the current financial year (April 1, 2021, to March 31, 2022) will be seen as taxable contributions.

In order to carry out calculation, separate accounts within the provident fund account shall be maintained starting 2021-2022 and all subsequent years for taxable contribution and non-taxable contribution made by a person.

Also, note that the Rs 2.5 lakh threshold is applicable for non-government employees while it is Rs 5 lakh in the case of government employees. This means that interest will be taxable if contributions to EPF and VPF exceed Rs 5 lakh in an FY.