Effective FY 2022, the government will tax interest income related to non-government employees’ share of PF contributions worth more than Rs 2.5 lakh in a financial year at an individual’s slab rate in the same year.
As far as the government employees are concerned, their PF contribution is voluntary. The government’s employer doesn’t make a matching contribution compared to private-sector employees; the interest income accrued on yearly PF contributions, which is more than Rs 5 lakh, will be taxed similarly. The EPF organisation will deduct the tax.
Interest income earned on contributions made by an employee until 31 March 2021 will be treated as non-taxable even if it exceeds the threshold level. To make the entire process transparent, the accruals of contributions made before 1 April 2021 and contributions lower than the threshold limit for taxation and the interests thereafter will be put in a separate account as they are not taxable. The taxable contributions and interest will be placed in another account. As a taxpayer, you will declare your tax payable in a financial year on PF via the returns you file in the consequent year.
EPFO’s yearly interest rate is relatively high compared to other market-based investment products such as fixed deposits. Therefore, the initiative to tax PF interest income more than a threshold limit aims to block the excess benefits of high-income employees.
EPF has been a popular tax-saving investment option as it falls under the exempt-exempt-exempt regime, i.e., there will be no incidence of tax at all three stages — contribution, accrual, and withdrawal. There will be a limit to its tax-free status with the new rule. Suppose your contribution to PF is more than the specified limit. You may want to revisit your investment plan in the wake of this new initiative, wherein interest on excess contribution will be taxed.
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