Govt Notifies Rules For Interest On PF Contribution: How It Will Be Calculated

The Central Board of Direct Taxes (CBDT) recently notified Income Tax rules in which interest income accrued in the provident fund (PF) of a person above a specified limit will be taxed. The rule will be applicable to those making contributions of more than ₹2.5 lakh a year.

According to the CBDT, the existing PF accounts will be split into two separate accounts in order to operationalise the new rule. It said that separate accounts within the PF account shall be maintained.

“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,” according to the Income-Tax (25th Amendment) Rules, 2021.

As per the new rules, non-taxable PF contribution to comprise closing balance in account as of March 31, 2021 and contribution made by person in account in 2021-22 and previous years, which is not included in taxable contribution account, within threshold and interest accrued on these.

The amount deposited above the specified threshold will be in the taxable contribution account and the interests paid on it will get taxed.

These new rules will come into force April 1, 2022. 

As per government estimates, about 1,23,000 high income earners are making more than ₹50 lakh a year in tax free interest on average from their provident fund accounts, Mint had reported on 4 February quoting a government official.

In her Budget for 2021-22, Sitharaman had capped the tax-free interest earned on provident fund contribution by employees and employers together to a maximum of ₹2.5 lakh in a year in an attempt to dissuade high earners from parking their surplus in what is supposed to be the common man’s retirement fund.

Nangia & Co LLP Partner Shailesh Kumar said the notification issued by CBDT has finally put to end the ambiguity which arose with the introduction of taxation of interest on provident funds with contribution above the specified threshold.

Rule 9D inserted in the Income-tax Rules, 1962 has specified that separate accounts within the PF accounts shall be maintained clearing segregating the taxable and non-taxable contributions to PF along with interest thereon.

“This shall provide a convenience of calculation to the taxpayers for segregation of interest to be offered to tax. The threshold for PF accounts with employer contribution is ₹2.5 lakhs whereas accounts with no employer contribution enjoy an increased threshold of ₹5 lakhs,” Kumar added.

Meanwhile, retirement fund body EPFO recorded net new enrolments of 12.83 lakh in June, giving an employment perspective in the country.

The provisional payroll data of EPFO (Employees’ Provident Fund Organization) released on Friday highlights a growing trend with 12.83 lakh net payroll additions during June 2021, a labour ministry statement said.

The impact of second wave of COVID-19 waned during June, leading to tremendous growth in net payroll additions as compared to April and May, it said.

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