New income tax rules explained

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The central government will tax interest on Employees Provident Fund (EPF) contributions above 2.5 lakh annually. Employees across India are required to have a PF account. From 1 April 2022, PF accounts are likely to be divided into two parts – taxable and non-taxable accounts under the set of new Income tax rules.

1) Any interest credited to the provident fund account of an employee shall be tax-free only for contributions up to 2.50 lakh every year and any interest on an employee’s contribution over 2.50 lakh shall be taxed in the hands of the employee year after year.

2) “After rationalization of Provident Fund in budget 2021, PF interest rate earned on investment beyond 2.5 lakh per annum is taxable if both employee and employer contributions in PF or EPF account,” said SEBI registered tax and invested expert Jitendra Solanki.

3) “The budget has provided that any interest credited to the provident fund account of an employee shall be tax-free only for contributions up to 2.50 lakh every year and any interest on an employee’s contribution over 2.50 lakh shall be taxed in the hands of the employee year after year.Please note it is the interest on excess contribution which will become taxable and not the contribution itself. The excess contribution can not be taxed as the contribution is made by the employee from his salary which already gets taxed. In case the employer does not contribute to the provident fund of the employee then the threshold applicable will be 5 lakh of employee’s contribution,” said Tax Expert Balwant Jain.

4) “The provident fund office or the employee PF trust will maintain two accounts for this purpose. one with contributions within the threshold and the other (second) for contribution over the threshold. It is interest on the second account which will be taxed every year. So it is not only for the year of contribution but also for all the subsequent years that the interest will become taxable,” Jain added

5) The employer contributes 12% of basic salary plus dearness allowance to EPF and deducts another 12% from the employee’s salary; 8.33% of the employer contribution goes to Employees Pension Scheme (EPS).

6) For the implementation of new rules, 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.

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

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

9) The EPFO, earlier this month, decided to lower the interest rate to a four-decade low of 8.1 per cent for 2021-22. 

10) The rate was 8.5 per cent for 2020-21.

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