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Explainer: Provident Fund Contributions Exceeding 2.5 Lakh Will Be Taxed

The government would tax Provident Fund (PF) payments that surpass 2.50 lakh per year, including employee and employer contributions, as well as interest generated. The ceiling has been raised to 5 lakh for government workers.

The tax charge was declared by the centre, citing multiple incidents of misuse by rich and high-net-worth persons who put large quantities of money into their PF accounts to avoid paying taxes on income generated throughout the year.

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This comes at a time when the Employees Provident Fund Organisation (EPFO) has cut interest rates to their lowest level in more than 40 years for the fiscal year 2021-22. (FY 22).

What does the new PF tax imply for you?

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From April 1, 2022, PF accounts are anticipated to be separated into taxable and non-taxable contribution accounts under the new Income Tax (I-T) Rules. The new restrictions attempt to discourage those with high incomes from taking advantage of government support programmes.

Any contributions to your PF accounts that exceed 2.5 lakh, including employee and employer contributions, voluntary, personal, and interest received, will be considered as taxable income.

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The tax on PF payments beyond 2.5 lakh too would be calculated depending on your income tax bracket and will be charged appropriately, according to Kiran Kumar, an independent tax consultant.

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