New Delhi: In a setback for high net-worth individuals (HNIs) those who used to invest huge amounts of their salary income as employee’s contribution in their PF accounts will now have to split their provident fund account into two accounts, while one account will be non-taxable as earlier but the second account will be a taxable PF account.
The Central Board of Direct Taxes (CBDT) on Wednesday notified the Income Tax (25th Amendment) Rules, 2021. The new rule says that for the sake of calculation, separate accounts within the provident fund account shall be maintained from FY 2021-22 for taxable and non-taxable provident fund contributions made by a person.
In this year’s budget, Finance Minister Nirmala Sitharaman introduced a new provision that makes interest earned on the provident fund contribution of an employee above Rs 2.5 lakh in a year taxable.
In some cases, where employer’s don’t contribute any amount in an employee’s provident fund account, the limit was set at Rs 5 lakh a year to bring parity between the two classes of employees, first whose employers contribute in PF accounts and the other ones whose employers don’t contribute the matching amount in their employee’s PF account.
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The rationale behind the decision was that the interest income on the PF deposits exceeding Rs 5 lakh in a year will be taxable. However, there was no clarity on how the decision will be implemented and at what stage the tax will be collected and deposited to the government. Whether it was to be done at the stage of interest accrual or it was to be done at the time of filing of the income tax return by an employee who will have to make a declaration and pay tax accordingly.
It appears that by splitting the PF accounts into taxable and non-taxable PF accounts, tax authorities plan to ask EPFO and other employers who manage their own provident and pension funds to deduct the tax at source on the taxable part of the interest earned on a provident fund contribution. The new provision applies to all provident fund contributions made since April 1 this year.
The amendment in the Income Tax Act was necessitated as per the government’s assessment there were about 1.23 lakh HNIs who were making on an average Rs 50 lakh tax-free interest income every year from their provident fund accounts. These high earning individuals constituted just about 0.27% of the total 4.5 crore EPF accounts in the country and were taking advantage of employee beneficial measures that encouraged the working class to save more by offering tax concessions.
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