Centre notifies new IT rules; Provident fund to be split into 2 accounts

The central government has notified new income tax rules under which the existing provident fund (PF) accounts will be split into two separate accounts. This move has come to enable the government to tax PF income generated from employee contributions which exceed Rs 2.5 lakh annually.

The Central Board of Direct Taxes (CBDT) on Wednesday issued the rules and separate accounts within the PF account shall be maintained. The Centre has said that all existing EPF accounts will be divided into taxable and non-taxable contribution accounts. 

The non-taxable accounts will include their closing account as it stood on March 31, 2021.

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On August 31, the Finance Ministry had notified the new rules and subsequently the Income Tax department too was informed.

In a bid to implement the new tax on PF income from employees’ contributions exceeding Rs 2.5 lakh annually, a new Section 9D in the income tax rules has been included.

To calculate the taxable interest, two separate accounts will have to be maintained within the existing provident fund account during the recently concluded financial year as well as all the preceding years, to assess the taxable as well as the non-taxable contribution made by a person.

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The government had in the Finance Act of 2021 introduced a new provision that makes interest accrued in the PF account on contribution above Rs 2.5 lakh a year taxable.

This only applies to contributions made from April 1, 2021. In cases, where there is no employer contribution, the threshold is Rs 5 lakh. The idea is to rationalise tax exemption for the income earned by high income employees.