In order to rationalise tax exemption for employees with higher income levels, it is proposed to limit tax exemption for interest income received on employees' contributions to various provident funds to a yearly contribution of Rs 2.5 lakh, according to the highlights of Budget 2021. Only contributions made on or after April 1, 2021 will be subject to this restriction. The Central Board of Direct Taxes (CBDT) has issued the Income-tax (25th Amendment) Rules, 2021 as a result of this. These regulations will go into effect on April 1, 2022.
In FY 2021-22, you'll have to pay tax on the interest earned on surplus contributions, and you'll have to report it on your income tax return in subsequent years. Employees in the private sector are free from the Rs 2.5 lakh restriction. The applicable threshold for government employees is Rs 5 lakh, which means that if EPF and VPF contributions exceed Rs 5 lakh in a fiscal year, interest received would be taxed. The two PF accounts will maintain track of taxable and non-taxable contributions simultaneously to make it easier for the taxpayer to calculate.
The non-taxable account will be made up of the total balance of your PF account on March 31, 2021, contributions made within the stipulated threshold in 2021-22 and following years, and interest received, according to the notification. The regulation will go into force in fiscal year 2021-22, therefore contributions made before March 31, 2021 will be tax-free.
CBDT has stated in its notification that:
(a) The Non-taxable contribution account is made up of the following items:
1. The account's closing balance as of March 31, 2021;
2. Any contribution made by the account holder during the fiscal years 2021-2022 and following fiscal years that is not included in the taxable contribution account
3. Interest earned under clauses (i) and (ii), as reduced by any withdrawals made from the account
(b) The total of the following shall be used to calculate the taxable contribution account:
1. Contribution in excess of the threshold limit made by the person in a prior year in the account during the previous year 2021-2022 and following previous years.
2. interest earned under subclause (i) as reduced by any withdrawals made from the account
(c) Threshold limit:
1. If the second proviso to clause (11) or clause (12) of section 10 applies, the amount is five lakh rupees.
2. In other circumstances, the amount is between two lakh and fifty thousand rupees.
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