A portion of the earnings of an employee goes towards PF (Provident Fund) which is a government-regulated fund. You save a lot of money while you are working and when you retire at the age of 60, you can withdraw the money as your pension money.
Interest in EPF was tax-free before 2021. However, Finance Minister Nirmala Sitharaman proposed in her budget address of 2021-22 that PF payments beyond Rs 2.5 lakh per year will be taxed. The CBDT has issued new guidelines that outline how the interest on an employee’s PF fund is affected if it is taxed.
The employer contributes 12% of the employee’s base salary plus dearness allowance to EPF and deducts another 12% from the employee’s pay; 8.33% of the employer contribution goes to the Employees’ Pension Scheme (EPS), which has no interest.
New PF rules
- The existing PF accounts will be divided into taxable contribution accounts and non-taxable contribution accounts.
- A new section 9D is added to IT rules where a new tax on PF will be imposed if the employees’ contribution exceeds Rs 2.5 lakh every year.
- In addition, two separate accounts will be created within the existing PF account to calculate taxable interest.
- All these rules will come into effect from April 1, 2022