From April 1, PF accounts will be divided into two for tax calculation

Existing provident fund (PF) accounts will most likely be divided into two parts on April 1. The government announced new income tax (I-T) rules in September of last year, under which PF accounts will be split into two. The move will allow the government to tax PF income for employees who contribute more than 2.5 lakh rupees per year.

The Finance Act of 2021 made interest on employee contributions to provident funds liable to income tax. The interest on PF which was previously exempt was made taxable for the contributions exceeding a prescribed threshold of 2.5 lakh (or 5 lakh in cases where the employer does not contribute) in any financial year (FY). This was aimed at preventing high-earning people from taking advantage of government welfare programmes.

Based on this, the funds will be split into taxable and non-taxable accounts for all existing PF accounts. The deposits up to 2.5 lakhs will go into the non-taxable account and the contributions above will be considered in the taxable account.  According to the Central Board of Direct Taxes (CBDT), non-taxable accounts will include their closing account as of March 31, 2021. The CBDT sets a policy for the department of information technology. The new changes could take effect as early as the next financial year, on April 1, 2022.

A new Section 9D has been added to the I-T rules to implement the new tax on PF income from employees' contributions exceeding 2.5 lakh per year.

Two separate accounts will be maintained within the existing PF account for taxable interest calculation during the recently concluded financial year as well as all previous years, to assess the taxable and non-taxable contributions made by a person.