Interest on EPF was totally tax-free prior to Budget 2021.
New Delhi: Employees who donate a portion of their savings to their fund each month are enrolled in the Provident Fund, which is maintained by the government. Anyone who has put money into it can take money out after they reach the age of 60, or even before. However, there are a few important conditions and guidelines to follow if a person wants to withdraw money from their EPF account before retirement.
Interest on EPF was totally tax-free prior to Budget 2021. Finance Minister Nirmala Sitharaman proposed in her budget address for 2021-22 that PF payments of more beyond Rs 2.5 lakh per year be taxed. The Central Board of Direct Taxes (CBDT) has issued new guidelines that outline how the interest on an employee’s provident fund contribution that exceeds a specific level is taxed.
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Employee Provident Fund (EPF) payments over Rs 2.5 lakh per year would be taxed, according to a notification published on August 31. This limit will be Rs 5 lakh per year for PF accounts when employers do not contribute.
The employer contributes 12% of the employee’s base salary plus dearness allowance to EPF and deducts another 12% from the employee’s pay; 8.33% of the employer contribution goes to the Employees Pension Scheme (EPS), which pays no interest.
Interest on non-taxable accounts will continue to be tax-free until March 31, 2021. Every year, the interest on the taxable account will be taxed.
All PF accounts must now be divided into two accounts: one for the taxable contribution and interest earned on that component, and another for the non-taxable contribution.
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New PF rules
- Existing PF accounts will be divided into taxable contribution accounts and non-taxable contribution accounts.
- Non-taxable accounts will also include their closing account, which has a March 31, 2021 expiration date.
- The new PF rules will be in effect beginning with the next fiscal year, on April 1, 2022.
- A new section 9D has been added to the IT rules to impose a new tax on PF income from employee contributions exceeding Rs. 2.5 lakh per year.
- In addition, two separate accounts will be created within the existing PF account to calculate taxable interest.
