Provident Fund to be split into two accounts into two separate accounts

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The government has decided to split existing Provident Fund (PF) accounts into two separate accounts to operationalize the new tax on PF income arising out of employee contributions exceeding Rs 2.5 lakh a year.

The Finance Ministry notified new Income Tax rules to this effect on Tuesday, but experts said this could prove to be an administrative nightmare for the Employees’ Provident Fund Organisation (EPFO) and a few thousand employers who manage their workers EPF savings in-house.

In this year’s Budget, Finance Minister Nirmala Sitharaman had announced the withdrawal of tax exemption on interest income accrued into PF accounts arising out of employee contributions exceeding ₹2.5 lakh, arguing that some employees were contributing huge amounts into their PF accounts and getting tax-free incomes.

Later, the government tweaked the threshold to add the ₹5 lakh cap for PF accounts where employers made no contributions.

This notification ends some of the ambiguity which arose with the introduction of taxation of interest on PF contributions above ₹2.5 lakh, noted Shailesh Kumar, partner at Nangia & Co. LLP, adding that segregating the taxable and non-taxable contributions to PF along with the interest on them shall provide some convenience for the calculation of tax liability.

According to the Income-Tax (25th Amendment) Rules, 2021 for calculation of taxable interest, separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person.

Accordingly, all EPF accounts will have to be bifurcated into a taxable and non-taxable contribution account, with the latter including their closing account balance as of March 31, 2021, any contributions made thereafter that are “not included in the taxable contribution account” and annual interest accrued on these two components.

The Central Board of Direct Taxes’ top brass had earlier said that taxpayers will have to include the taxable PF interest in their total income while filing tax returns, but the new rules suggest that the EPFO and PF trusts run by companies may have to deduct tax and remit it to the exchequer from such accounts.

A retirement benefits expert said it’s not clear from the notification whether the tax has to be deducted from the taxable EPF account or simply added to one’s I-T returns as earlier suggested.

“Apart from the hassle of maintaining two accounts from each member, if tax has to be deducted at source, this shall require the EPFO to issue tax deduction at source certificates or Form 26AS for each member making contributions over ₹21,000 a month,” he pointed out. The resultant paperwork aside, implementation could also be a challenge as EPFO accounts are not linked to the Permanent Account Numbers (PAN) issued by the Income Tax Department.