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Rules Out on Taxing Interest on PF over Rs.2.5L

The government has notified rules for calculating tax on interest accrued on employees’ provident fund (EPF) and voluntary provident fund (VPF) contributions above Rs.2.5 lakh in cases where the employer is a contributor, and above Rs.5 lakhs where the employer isn’t.

In a notification issued Wednesday, the Central Board of Direct Taxes (CBDT) said two separate accounts within the PF account will have to be maintained in 2021-22 and on wards for segregating the taxable and non-taxable contributions.

The taxable contribution account will be the aggregate of the contribution made by the person beyond the threshold limit and interest accrued on the contribution, minus any withdrawals made.

On the other hand, non-taxable contributions will be the aggregate of the closing balance as of March 31, 2021, contributions made by the account holder that are not included in the taxable contribution account, and interest accrued on the total sum, minus any withdrawals.

The rules will come into effect from April 1, 2022, according to the notification.

Experts said the amendment could lead to higher compliance burden, even as the attempt is to dissuade high-salaried individuals from parking funds in fixed income generating avenues.

“This would bolster the overall purchasing power as well as augment economic recovery. That said, the new rule would definitely lead to increased compliance burden, as the amendment necessitates maintenance of separate sub-accounts within the existing provident fund account to compute the taxability,” said Rahul Charkha, partner at Economic Laws Practice.

In the Union Budget this year, the government had introduced the provision to tax interest income on contributions above Rs.2.5 lakh a year.

Finance minister Nirmala Sitharaman then raised the limit on the annual contribution to PF accounts for tax-free interest to Rs.5 lakhs from Rs.2.5 lakh for funds where there is no contribution by the employer.

“Most often, it is employee contribution and employers’ contribution, but there are contributions which are only employee and no employer contribution is made. In such cases, that amount is raised to Rs.5 lakhs,” Sitharaman had said.

The government had introduced the change to plug the misuse of the benefit by high-income earners who were making large deposits in EPF. Interest earned on the provident fund corpus is tax-free and no tax is levied at the time of withdrawal, making it an attractive investment option.

Private sector subscribers to the Employees’ Provident Fund Organization (EPFO) also have employer contributions in their retirement savings. Government employees contribute to the general provident fund (GPF) without any employer contribution.

The higher limit of Rs.5 lakh on provident fund contributions will largely benefit government employees, as it’s available in cases where the employer is not making a contribution.  S-ET

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