PF Tax Update: Starting from April 1, it is likely that your provident fund could be taxed as per the government’s new rules. The Union government is putting in place a plan to charge taxes on Employees Provident Fund (EPF) contributions above Rs 2.50 lakh in one year. However, for government employees, the limit has been set higher at Rs 5 lakh when this rule comes into place. An Employees Provident Fund (EPF) account, commonly referred to as a PF account, is required by all employees across India. This is aimed at utilising the funds, saved during their work tenure, after retirement. The scheme has been designed by the The Employees Provident Fund Organisation, or EPFO, the top retirement body of the central government, so that employees can fall back on the corpus created from this fund after they have retired.
PF accounts are now likely to be sectioned into taxable and non-taxable contribution accounts under the set of new Income Tax Rules. This may be done from April 1 itself. It must also be noted that this new rule will only apply to the contributions made by the employee, while contributions made by the employer will not be taxed.
Who is Going to Pay PF Tax?
As said earlier, the new rule will only apply to employee contributions to the EPF account, and employer contribution will remain tax-free. PF tax will be applicable to only those with an annual income of Rs 20.83 lakh or more and thereby is only going to affect a few high income earners.
But how is PF tax going to be calculated? For instance, if a non-government employee contributes Rs 5 lakh in his or her EPF account in one year, From this, Rs 2.50 lakh is going to be taxed and the rest of the amount will remain non-taxable. However, the rule is not the same for government employees. If a public sector employee contributes Rs 6 lakh to provident fund, only Rs 1 lakh will be considered as taxable income and the rest of the amount will remain tax-free. Government employees have the facility of GPF, or Government Provident Fund, which is an account where only the employee makes contributions.
The purpose of this new amendment is that the government wants to curb high income earners from self-contributing more to their PF accounts. Several employees make more contributions than required to their PF accounts to save taxes.
The Centre had earlier said that this move will affect less than 1 per cent taxpayers in India. The Central Board of Direct Taxes has notified the creation of a new Section 9D under the Income Tax Rules, 1962, to implement the new rule. The CBDT has however said that PF contributions up to March 31, 2021, will remain tax-free.
There is a provision of opening two PF accounts after this amendment — one of which will be the taxable account and the other will be tax-free. The government at present has set PF interest rate at 8.1 per cent, which is the lowest in 40 years.
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