PF Update: From the beginning of April, it is likely that Provident Fund, or PF, contributions of all government and private sector employees, who fall under a certain bracket, are going to be taxed. The government has chalked out plans to impose taxes on Employees Provident Fund (EPF) contributions that exceed Rs 2.50 lakh per year. In case of government employees, however, the limit has been set higher at Rs 5 lakh when this rule comes into place. Employees across India are required mandatorily to have an Employees Provident Fund (EPF) account, commonly referred to as a PF account to utilise the funds post retirement.
Here are the Key Things You Must Know Regarding the PF Rule Change
1. The move is meant for only high earning individuals and would impact only a fraction of taxpayers in the country. Under the new rules, the PF accounts are likely to be divided into taxable and non-taxable contribution accounts under the set of new Income Tax Rules. Another important thing to note is this new rule will only apply to the contributions made by the employee, while contributions made by the employer will not be taxed.
2. Explaining the new rule, Maneet Pal Singh, partner at I.P. Pasricha & Co said, “If deposits in EPF and VPF by an Employee exceed Rs.2.5 Lakh in a financial year, then the interest earned on the contributions exceeding Rs.2.5 Lakh will be taxable in the hands of employee. In case there is no contribution done by employer to the EPF account then interest will be tax-exempt for the deposit up to 5 Lakh in a financial year.” For government employees, the government does not make any contributions so the limit is set higher.
3. “This move is going to impact on high-income salaried individuals depositing higher amount in PF. Anyone who has more than Rs 21 lakh PF wage a year will definitely attract his or her interest on EPF contribution being taxed which comes out to be roughly 1 per cent of PF contributors,” Singh added. This means that most salaried PF contributors do not need to worry about their pension scheme being taxed.
4. The Central Board of Direct Taxes, which frames policies for the Income Tax Department, has notified the creation of a new Section 9D under the Income Tax Rules, 1962, to implement the new rule. The CBDT has however said that PF contributions up to March 31, 2021, will remain tax-free. This means that only contributions made from April 1, 2021 will become taxable under the new rule.
5. To save taxes that may arise against PF contributions, one can do a number of things, as per Singh. “One can divert their voluntary contribution to PF to other Investment options like NPS, Ulips, etc. subject to understand their taxability as well. One should also understand that income tax return helps in creating wealth as well and not all investments provides tax free income,” he told News18.com.
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