The government has worked out a two-account formula for taxing interest income of Provident Fund (PF) account holders.
According to a circular issued by tax body CBDT, all existing PF accounts will be split into two accounts — one for non-taxable component and the other for taxable portion.
“For the purpose of calculation of taxable interest, 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 circular stated.
What this means is that till March 31, 2021 all contributions made in PF accounts will be placed in the non-taxable account along with all future contributions up to Rs 2.50 lakh per year. From April 1, 2021, any contribution beyond the Rs 2.50 lakh limit will be credited to the taxable account.
The interest earned on the amount in the taxable account will be taxed as per existing tax slabs. The onus of splitting PF accounts is on EPFO.
In the Union Budget 2021, Finance Minister Nirmala Sitharaman announced that the interest earned on employees’ contributions in provident fund in excess of Rs 2.50 lakh a year will be subject to tax. Later, the government tweaked the threshold to add the Rs 5 lakh cap for PF accounts where employers made no contributions.
For government employees, this EPF contribution threshold is at Rs 5 lakh. This has come into effect from the financial year 2021-22 (assessment year 2022-23).
