The central government notified a new income tax rule. Under this rule, the existing Provident Fund (PF) Accounts will be divided into 2 separate accounts. With this move, the government will be able to levy tax on income that is earned by employees from money deposited in the PM, which is more than Rs 2.5 lakh annually. It means that if the PF accounts earn more than Rs 2.5 lakhs, then the government will levy a tax on it.
In this regard, the Central Board of Direct Taxes (CBDT) issued rules & 2 separate accounts will be created with PF accounts. Thereafter, the entire existing Employees’ Provident Fund (EPF) accounts will be bifurcated into taxable & non-taxable deposit accounts. The non-taxable account includes their closing account as of March 31, 2021. The new rules were notified by the Finance Ministry on August 31 & later the Income Tax Department was also informed.
What Will Change In PF Account?
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This rule is likely to be implemented from the financial year i.e. April 1, 2022.
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After the implementation, every person will have 2 accounts in PF Account.
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There will be an account, in which interest money will be deposited on which no tax will be charged.
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The second account will be the one, in which tax liability money will be deposited.
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A new section 9D has been included in the Income Tax Rules, to apply for the new tax on PF Income, if the amount deposited in PF earns more than Rs 2.5 lakh annually.
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For computing taxable interest, the taxable & non-taxable deposits deposited by an individual will be reckoned.
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For this, it will be important to maintain 2 separate accounts within existing PF Accounts.
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All the previous money in PF Accounts will be kept in a single account, which will be tax-free.
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In the financial year 2022, each subscriber will be given a new PF Account, where the contributions above Rs 2.5 lakh will be taxed.
Why Two Accounts?
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As per the tax experts, this announcement by the government has cleared up any misconception & made the interest calculation even more convenient.
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The purpose is to prevent high-earning people from misusing government welfare schemes.
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Such people take the advantage of these schemes & collect tax-free amounts in the form of guaranteed interest.
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Like the bank interests, PF interest is calculated on year to year basis.
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While submitting tax returns, taxpayers will be obliged to include the interest earned in their PF accounts in excess of Rs 2.5 lakh in ITR.
Note:
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The limit of Rs 2.5 lakh is applicable to non-government employees; on the other hand, the limit of Rs 5 lakh is for government employees.
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The previous budget announcement in February 2021, didn’t give any correct information’s about how taxable income would be calculated.
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Nor was it explained in detail about, how it would be segregated from the non-taxable deposits.
