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The Finance Ministry has decided to split existing Provident Fund (PF) accounts into two separate accounts. The ministry has notified the Income Tax (I-T) department on 31st August regarding the same.
The Centre has notified new income tax rules under which the existing provident fund (PF) accounts will be split into two separate accounts, to enable the government to tax PF income generating from employee contributions which exceed ₹ 2.5 lakh annually.
Subsequently, all existing employees provident fund (EPF) accounts will be divided into taxable and non-taxable contribution accounts.
The non-taxable accounts will include their closing account as it stood on March 31, 2021.According to official sources; these rules are likely to come into effect from the next financial year, i.e. from April 1, 2022 onwards.
The government has mentioned that the purposes of the first and second provisos to clauses (11) and (12) of Section 10, income by way of interest accrued during the previous year which is not exempt from inclusion in the total income of a person under the said clauses (hereinafter in this rule referred to as the taxable interest), shall be computed as the interest accrued during the previous year in the taxable contribution account.
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, the notified.
The government has explained that for the purposes of this rule, Non-taxable contribution account shall be the aggregate of the following, namely (i) closing balance in the account as on 31st day of March 2021; (ii) any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous years, which is not included in the taxable contribution account; and (iii) interest accrued on sub-clause (i) and sub-clause (ii), as reduced by the withdrawal, if any, from such account
Taxable contribution account shall be the aggregate of the following, namely (i) contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit; and (ii) interest accrued on sub-clause (i), as reduced by the withdrawal, if any, from such account.
The threshold limit shall mean: (i) Rs 5 lakh, if the second proviso to clause (11) or clause (12) of section 10 is applicable; and (ii) Rs 2.50 lakh in other cases, it has been notified.
In the Union Budget 2021, the Finance Minister announced that interest on Employees’ Provident Fund (EPF) and Voluntary Provident Fund (VPF) contributions above Rs 2.5 lakh in a financial year will be taxable.
The calculation of taxable interest for the year shall be computed as the interest accrued during the previous year in the taxable contribution account where all contributions over Rs 2.5 lakh a year would be parked. The same threshold is Rs 5 lakh for PF accounts where employers do not contribute, but most EPF accounts, by definition, usually include matching contributions from employers and employees of 12% of monthly salary.
To calculate the taxable interest, two separate accounts will have to be maintained within the existing provident fund account during the recently concluded financial year as well as all the preceding years, to assess the taxable as well as the non-taxable contribution made by a person.