From the current financial year 2021-22 onwards, the CBDT has said that two distinct PF accounts must be kept, one for taxable contributions and the other for non-taxable payments.
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Tax on Provident Fund contribution
1. TAX ON PROVIDENT FUND CONTRIBUTION
On August 31, 2021, the Central Board of Direct Taxes (CBDT) published a notification making
Provident Fund (PF) payments exceeding specific threshold limitations, as well as the interest on
such excess contributions, taxable beginning April 1, 2022.
Making PF taxable, which was previously a tax-saving tool, has left private-sector employees
concerned and perplexed.
The Finance Act of 2021 stipulated that any interest relating to the amount of Provident Fund
contribution paid by employees that exceeds Rs 2,50,000 is taxable. However, in circumstances
where the employee is the sole one contributing to the Provident Fund, the maximum of Rs
2,50,000 would be increased to Rs 5,00,000. As a result of the amendment, the Provident Fund
account would have two accounts, one for the Taxable component and the other for the Non-
Taxable component.
Rule 9D requires that separate accounts for taxable and non-taxable contributions be kept inside
the provident fund account, as follows:
TAXABLE CONTRIBUTION NON- TAXABLE CONTRIBUTION
Taxable component of contribution (i.e.,
contribution exceeding the threshold limit)
and interest accrued thereon
Closing balance of EPF as on 31st march 2021
Non- taxable component of contribution and
interest accrued thereon
The above-mentioned rule would apply to taxable and non-taxable contributions made by a
person for the financial year 2021-2022 and all subsequent years.
The recently notified Rule 9D does not create much ambiguity; rather, it explains the taxable
interest component computation mechanism. Furthermore, the requirement of separate
accounts would add to EPFO's complexity and compliance cost, as well as those of employers
who manage their employees' EPF accounts.
An example of how the EPF will be charged in numbers
An employee with a balance of Rs 10,00,000 in his EPF account contributes Rs 4,00,000 to the
EPF, while the employer contributes the same amount. In this situation, the gift would be split
into two parts:
TAXABLE CONTRIBUTION NON-TAXABLE CONTRIBUTION
Rs 400000 โ Rs 250000 = Rs 1,50,000
Add: Interest accrued on Rs 1,50,000 = ****
Rs 1000000 โ Rs 250000 = Rs 1250000
Add: Interest accrued on Rs 1250000= ****
2. How do I pay my tax?
There are some questions about the employee's responsibility to pay tax versus the payer's
responsibility to withhold tax.
The employee's responsibility for tax payment differs from the payer's responsibility to withhold
tax. Any person making a payment of accumulated EPF balance to any employee, provided the
quantum of such payment exceeds Rs 50,000 and the money is payable to tax in the hands of the
employee, was already obligated to withhold tax under section 192A of the IT Act. As a result,
such a duty to withhold tax is not a result of the CBDT Circular recently issued, but is already
enshrined in Section 192A of the IT Act.
TDS certificate to be issued by EPFO
According to the IT Act, everyone who deducts TDS when making a payment to an assessee is
required to issue a TDS certificate to that assessee within a certain time frame. This certificate
serves as documentary documentation that the assessee can use to claim TDS credit while filing
his tax return. As a result, EPFO will be required to issue TDS Certificates to employees who have
tax deducted or withheld.
How to Save Taxes?
Before making investments, EPF subscribers who contribute more than the threshold limit should
examine their investment strategy in light of the taxation of the excess contribution and consider
other alternative investment choices.