Taxation on PF Contributions: On August 31, the Central Board of Direct Taxes (CBDT) had issued a notification regarding Provident Fund (PF) contribution. Under this, from April 1, 2022, the contribution of more than a limit and the interest received on it has been brought under the tax net. With the tax-saving instrument making PF taxable, now a situation of confusion has arisen in front of the private sector. According to Dr Suresh Surana, Founder, RSM India, the Employees Provident Fund (EPF) subscribers are facing a dilemma due to the Finance Act 2021.
Under the Finance Act 2021, if an employee contributes more than Rs 2.5 lakh to the PF, then the interest earned on the contribution above this limit becomes tax liability. However, if only the employee contributes to the Provident Fund, then this limit is Rs 5 lakh instead of Rs 2.5 lakh. In such a situation, there will be a situation of creating two accounts, taxable and non-taxable components within the PF account and due to this, the employee is getting confused.
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Increased responsibility on EPFO and employers
Apart from this amendment, the CBDT has notified a rule 9D, under which the method of calculation of tax on interest in case of excess amount deposited in the PF account has been given. Under this rule, two separate accounts have to be maintained within the PF account. This rule has become effective from the financial year 2021-22. However, this will increase the compliance burden on the EPFO and the employers regarding the maintenance of different accounts.
In this way the tax on EPF will be calculated
If an employee has Rs 10 lakh in EPF account and he contributed Rs 4 lakh in EPF account and the same contribution is made by his company then Rs 1.5 lakh (Rs 4 lakh-2.5 lakh) under Rule 9D and earned thereon Interest will be taxable. Apart from this, an amount of Rs 12.5 lakh (Rs 10 lakh + Rs 2.5 lakh) and interest earned thereon will be treated as non-taxable.
how to save tax
EPF subscribers who are depositing more money than the threshold should evaluate their investment plan. In view of the new taxation rules, subscribers should consider alternative investment options to save tax.
(Article: Amitav Chakraborty)