CBDT notifies rules to compute taxable interest in PF account

 







NEW DELHI : The Central Board of Direct Taxes (CBDT) on Wednesday notified the manner in which interest income accrued in the provident fund of a person above a specified limit will be taxed.


The Income-tax (25th Amendment) Rules, 2021 says that for the sake of calculation, separate accounts within the provident fund account shall be maintained from 2021-22 for taxable and non-taxable contribution made by a person.

The government had in the Finance Act of 2021 introduced a new provision that makes interest accrued in the PF account on contribution above ₹2.5 lakh a year taxable. This only applies to contribution made from 1 April 2021. In cases, where there is no employer contribution, the threshold is ₹five lakh. The idea is to rationalise tax exemption for the income earned by high income employees.

The new rule clarifies that the non-taxable contribution account will comprise of the closing balance in the PF account as on 31 March 2021 as well as any contribution made by the person in the account in 2021-2022 and in later years within the threshold specified and the 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.

Experts said that this is an effort to rationalize the tax exemptions available to high-income employees.

“As this amendment will curtail the fixed tax- free income generating avenues for high-salaried individuals, there might be a need to revisit their long-term financial plans and consider exploring other investment alternatives," said Rahul Charkha, partner at Economic Laws Practice, a law firm.

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.

These high net worth individuals (HNIs) account for about 0.27% of the 4.5 crore Employees’ Provident Fund (EPF) account holders.

Their average corpus is Rs. 5.92 crore per person and thus earn around Rs. 50.3 lakh per person a year on average in tax free assured interest.



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