New Delhi: In an effort to operationalise the new tax on Provident Fund (PF) income emerging out of employee contribution that exceeds Rs. 2.5 lakh a year, the Union Finance Ministry has made the decision to split the existing Provident Fund accounts into two separate accounts.
This was implemented with the issue of a new set of Income Tax rules on Tuesday.
As per expert opinions, this could be a problem for the administration officials of the Employees' Provident Fund Organisation (EPFO) and the employers who manage their employees' EPF savings in-house.
The Central Board of Direct Taxes (CBDT) had issued a notification on Tuesday. The Income-Tax (25th Amendment) Rules, 2021 states, "For the purpose of calculation of taxable interest…, separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person."
It also ordered the bifurcation of all EPF accounts into a taxable and non-taxable contribution account. Further, the non-taxable contribution account must include the close account balance as of March 31, 2021, and any contributions made thereafter that are "not included in the taxable contribution account" and annual interest accrued on these two components.
The EPFO had 24.77 crores account holders. As of March 31, 14.36 crore of them had been allotted Unique Account Numbers (UAN) and 5 crores of them had been active contributors into their EPF accounts during 2019-20.
As per the new rule, "The calculation of taxable interest for the year shall be computed as the interest accrued during the previous year in the taxable contribution account where all contributions over Rs 2.5 lakh a year would be parked."
According to a report, "The same threshold is Rs 5 lakh for Provident Fund (PF) accounts where employers do not contribute, but most EPF accounts, by definition, usually include matching contributions from employers and employees of 12% of monthly salary."