An important new rule has been introduced for all employees who have an existing Provident Fund (PF) account. As per the new rules implemented by the central government, the PF account of the EPFO subscriber will be divided into two separate accounts.
The Finance Ministry has stated that this decision has been made for tax purposes and has notified the Income Tax department of the same. Under this variation, a new tax will be levied on PF income from employee contributions exceeding Rs 2.5 lakh a year.
As per the new rule in the Employees’ Provident Fund Organisation (EPFO), the Centre has inserted Section 9D for the calculation of taxable interest relating to PF contributions exceeding the above-mentioned limit.
The Finance Ministry further notified that this new rule for EPFO subscribers will be called the Income Tax (25th Amendment) rules 2021, and they will come into effect from April 1, 2022. It must be noted that tax will be levied for those who have PF contributions exceeding Rs 2.5 lakh per year.
All the existing EPFO accounts will thus be bifurcated into two separate accounts- taxable and non-taxable deposit accounts. The new rules were introduced to the Finance Ministry on August 31, 2021, and will come into effect from next year.
After the implementation of this new EPFO rule, every employee will have two PF accounts. One account will be there for deposited interest money, on which no tax will be levied. The second account will see deposits of money on which tax is liable.
The main purpose of this new rule is to prevent employees with a high income from misusing the government welfare schemes and making income tax fair for everyone. It will prevent high-income individuals from collecting tax-free amounts in the form of guaranteed interest.
It must be noted that the limit of Rs 2.5 lakh has been set for non-government employees only. For government employees, the limit is set at Rs 5 lakh. The PF interest for all the employees is calculated on a yearly basis, similar to bank interest. More details of this rule will be issued by the Finance Ministry soon.
