New income tax rules on Provident Fund contributions

The Central Board of Direct Taxes (CBDT) recently notified Income Tax rules in which interest income accrued in the provident fund (PF) of a person above a specified limit will be taxed. The rule will be applicable to those making contributions of more than ₹2.5 lakh a year.This limit was later enhanced to ₹5 lakh for PF accounts where employers make no contributions.

The rule requires all PF accounts to be split into separate accounts – one with the taxable contribution and interest earned on that component, and another with the non-taxable contribution that shall include the closing balance of the PF account as on March 31, 2021 and all fresh non-taxable contributions and interest thereon.The amount deposited above the specified threshold will be in the taxable contribution account and the interests paid on it will get taxed.

These new rules will come into force April 1, 2022. In her Budget for 2021-22, Sitharaman had capped the tax-free interest earned on provident fund contribution by employees and employers together to a maximum of ₹2.5 lakh in a year in an attempt to dissuade high earners from parking their surplus in what is supposed to be the common man’s retirement fund.


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