Provident Fund or PF is the most popular retirement savings plan in India. It allows employees to deposit a specific portion of their salary into their EPF account every month for generating interest income. The employers can also deposit into the PF account of their employees. On retirement or end of employment, the employees can access the lump sum amount.
EPF enjoyed EEE (Exempt, Exempt, Exempt) tax status until 2021. In other words, the employees were not required to pay any taxes on EPF investments, earnings, and withdrawals. But Budget 2021 has made interest income from PF contributions above a certain threshold taxable. Here’s everything you should know about the new amendments:
Tax on PF Interest
The Finance Bill 2021 introduced a new provision to Sections 10(11) and 10(12). As per the new provisions, PF contributions of ₹2.5 lakhs and above in a financial year would be taxable if the employee and employer are contributing to the PF account.
However, if only the employee is making PF contributions, the non-taxable contribution limit is ₹5 lakhs. The new provision will only apply to PF contributions on and after 1st April 2022. It is also worth noting that if the employer’s contribution to NPS, superannuation, and EPF exceeds ₹7.5 lakhs in a financial year, the interest generated on the excess contribution will be taxable.
Rule 9D for Computing Taxable PF Interest
In August 2021, the Central Bureau of Direct Taxes (CBDT) notified Rule 9D through Notification No. 95/2021 to compute taxable PF interest. As per the rule, two separate accounts, taxable and non-taxable, will be maintained in every PF account.
It will include the taxable component of the contribution and the interest generated from the same.
It will include the non-taxable component of the contribution and the interest generated from the same. The closing balance of the PF account as of 31st March 2021 will be included in the non-taxable account.
Example of Interest on PF Interest
Let us assume that an employee has ₹5 lakhs in his PF account. He contributes ₹3.5 lakhs to the PF account, and his employer also makes a matching contribution. So, the contribution will be divided as follows:
|Taxable Contribution||Non-Taxable Contribution|
|₹1 lakh (₹3.5 lakhs-₹2.5 lakhs) and interest generated on ₹1 lakh||₹7.5 lakhs (₹5 lakhs + ₹2.5 lakhs) and interest generated on ₹7.5 lakhs|
TDS Certificate by EPFO
As per the IT laws in the country, any individual responsible for deducting TDS must issue a TDS certificate to the assessee mandatorily. As the EPFO will be deducting TDS for PF savings plans, the employees will be receiving a TDS certificate if their PF interest is taxed.
Employees can use the TDS certificate when filing tax returns for claiming a TDS refund if they are eligible for the same.
If you are investing in PF beyond the threshold limit set forth by the government, you should re-evaluate your investment plan as it might not be the most tax-efficient option. You can now find a wide range of pension plans, protection plans, health plans, ULIPs, and more that offer tax savings along with a host of valuable benefits.