Income tax rules: Tax on PF interest, reduction in the time limit of ITR filing, other changes
The Employees’ Provident Fund Organisation (EPFO) earlier this month announced an interest rate of 8.1% on EPF or employee provident fund accumulations in members’ accounts for the 2021-22 fiscal, down from 8.5% in the previous year.
The interest on EPF was fully tax-free in the hands of provident fund contributors till changes were introduced in the Budget 2021, effective from 1st April 2021. The interest accrued on EPF contributions beyond a particular threshold will be taxable.
For the sake of calculation, separate accounts within the provident fund account shall be maintained starting 2021-2022 and all subsequent years for taxable contributions and non-taxable contributions made by a person, say tax experts.
Or in other words, the provident fund office or the employee PF trust will maintain two accounts for this purpose:
One with a contribution within the threshold
and the other (second) for contribution over the threshold.
How new income tax rules on EPF interest will apply:
1) According to the new rules, 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 the employee’s contribution over 2.50 lakh shall be taxed in the hands of the employee year after year.
Further, in case there is no contribution by the employer to the EPF account (usually in the case of government employees), then interest will be tax-exempt for deposits up to Rs 5 lakh in a financial year.
Thus, in the new financial year to avoid tax on the PF interest, ensure that the deposits in your EPF account do not exceed the specified limits mentioned above.
2) The ₹5 lakh limit covers around 93% of the people who are EPFO subscribers and they will continue to get assured tax-free interest, according to the interest rate announced by EPFO every year.
3) The employer contributes 12% of the 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) which earns no interest.
4) “Please note it is the interest on the excess contribution which will become taxable and not the contribution itself. The excess contribution cannot be taxed as the contribution is made by the employee from his salary which already gets taxed,”
5) As far as the balance standing to the credit of an employee as of 31st March 2021 is concerned, interest on this non-taxable account will continue to remain tax-free.
6) It is interest on the second account (taxable) which will be taxed every year.
7) For the second account (taxable), it is not only for the year of contribution but also for all the subsequent years that the interest will become taxable,