As per the FM Budget proposal, Income tax has been amended to levy tax on the interest accrued in the provident fund account of the high-income employees to the extent it relates to the number of annual contributions made by employees exceeding INR 2.5 lakhs with effect from FY 21-22 onwards. CBDT has now prescribed Rule 9D for computation of such interest.
With effective from 1st Apr 2021, no more tax-free interest on more than Rs.20833 pm (In a FY:2.5L) contribution towards EPF / VPF (only employee contribution) then such PF Accounts are required to be split into Taxable PF Account and Non-Taxable PF Account. All contributions made by employees exceeding the specified threshold of INR 2.5 lakhs and interest thereon will be shown in ‘Taxable Contribution Account’.
Note:
- Employee will have 2 components in their PF account from 1st April 2021. Accumulated PF balance as on 31st March 2021 will remain in 1st Component.
- Employer contribution towards PF will not be considered to arrive at this 2.5 Lakhs limit. Only Employee contribution is counted.
- The threshold limit specified as Rs. 5 Lakh is applicable for Central Government Employees / armed Forces, etc.. & for Private Ltd. Employees the threshold is 2.5 Lakhs.
Open questions awaiting clarity from EPFO:
- Are they intending to deduct Tax at Source? Or is it left to the Employer & employee to remit Tax at Employee hand is not clear.
- This is made applicable from FY 2021-22. PF Year is Mar to Feb. Hence how this needs to be accounted is not clear.
- Awaiting clarity for taxation on perpetuity i.e. If the employee annual contribution to PF in FY 2022 is Rs. 10 Lakh, whether the interest income on Rs. 7.5 lakh (10L– 2.5L) will get taxed only for FY22 or also for all subsequent years. If the PF Contribution is the same for FY 2023, the tax whether will have to be paid on interest income on Rs. 15 lakh (Prior year 7.5L+Current year 7.5L). These clarifications are awaited from EPFO body.
Right now the immediate action is to be taken by EPFO and exempted PF trusts. There’s no immediate concern for unexempted establishments until the necessary process is laid down by EPFO.