Provident Fund contributions above 2.5 lakh to be taxed

New Delhi: The Centre has planned to tax Employees Provident Fund (EPF) contributions exceeding ₹ 2.50 lakh yearly. For government employees, the limit has been set at a higher end of Rs 5 lakh, according to NDTV report. Under the set of new Income Tax (I-T) Rules, PF accounts are likely to be divided into two parts -- taxable and non-taxable contribution accounts from April 1, 2022.

This comes at a time when retirement body EPFO has reduced interest rates to the lowest in more than 40 years for the ongoing financial year 2021-22 (FY 22).

The reduction marks the lowest interest rate since 1977-78 when the figure stood at 8 per cent. EPFO is the top decision-making body Central Board of Trustees (CBT).

Threshold Limits Under I-T Rules: For instance, a non-government employee puts ₹ 5 lakh in PF account Rs 2.50 Lakh will be subject to tax; and if a government worker, puts Rs 6 lakh in PF, Rs 1 lakh will be subject to tax. Government employees contribute to the General PF or GPF, where just employees make PF contributions.

With the new rules, the Centre aims to prevent high earning people from taking advantage of government welfare schemes.

Previously, the government had mentioned that the move would impact less than 1 per cent of taxpayers.

For the implementation of new rules on PF income from employees' contributions exceeding Rs 2.50 lakh per annum, a new Section 9D has been included under the Income Tax Rules, 1962, according to a notification issued by the Central Board of Direct Taxes. The CBDT frames policy for the I-T department.

It also mentioned that all contributions until March 31, 2021, will be treated as non-taxable contributions.

This implies that contributions for the current financial year (April 1, 2021, to March 31, 2022) will be handled as taxable contributions.

Usually, non-government employers deduct 12 per cent of basic salary as EPF contribution every month while adding a similar figure to it and then depositing it with the EPFO.

EPF accounts are mandatory for employees earning up to Rs 15,000 per month in any firm with over 20 workers.