PF account will be divided into two parts as per new Income Tax rules

The central government has notified new income tax rules, under which existing provident fund (PF) accounts will be divided into two separate accounts. With the help of this, the government will be able to put taxes on earning interest on employee contributions of more than ₹2.5 lakhs per annum.

According to the CBDT notification, a separate account will be opened in the PF account itself for the calculation of interest on PF. All existing Employee Provident Fund (EPF) accounts will be divided into taxable and non-taxable contribution accounts.

The Central Board of Direct Taxes (CBDT) has issued the rules.

The government had introduced a new provision in the Finance Act of 2021 which makes the interest earned in the PF (Provident Fund) account taxable on contributions above ₹ 2.5 lakh annually. This is applicable only on contributions made from 1st April 2021 onwards.

PF Accounts in India

Employees Provident Fund Organization (EPFO) has 24.77 crore members with EPF accounts, out of which 14.36 crore members were allotted Unique Account Number (UAN) till March 31, 2020. Of these, about 5 crore members were regular active contributors in their EPF accounts during 2019-20.

According to government estimates, around 1,23,000 high-income employees are earning an average of over ₹ 50 lakh annually in tax-free interest from their provident fund accounts. This is the reason why the government is implementing new rules to tax them.

According to the CBDT notification, no tax will be levied on any contribution till March 31, 2021, but interest earned on PF accounts after the financial year 2020-21 will be taxable and will be calculated separately.

The CBDT has said in its notification that the new rules will be applicable from April 1, 2022, but till the financial year 2021-22, if the annual deposit in your account exceeds ₹ 2.5 lakh, then the interest earned on it will be taxable and thereon. You have to pay tax. People will have to give information about this interest in the income tax return of the next year.