Separate accounts within FPs to be kept for tax purposes

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Separate accounts will be maintained within the provident funds, including the employee provident fund (EPF), where interest is taxable above a threshold from the current financial year.

The 2021-2022 budget announced an income tax on interest accrued on annual provident contributions exceeding Rs 2,50,000 for non-government employees and Rs 5,000,000 for government employees.

To remove any ambiguity on its operation, the Central Council of Direct Taxes inserted rule 9D of the Income Tax Law. He specified that separate accounts within the provident fund accounts will be maintained, separating taxable and non-taxable contributions to FPs.

“This will make it easier for taxpayers to calculate for the interest segregation to be proposed for tax,” said Shailesh Kumar, partner at Nangia & Co.

Employers contribute 12 percent of base salary and cost allowance, and employees contribute an equal amount to EPF and other funds. Employees benefit from an income tax deduction under section 80C for PEF contributions up to Rs.150,000 per year. Employers can also contribute to the EPF on a voluntary basis. This is called a voluntary provident fund (VPF). This savings does not give the right to a tax deduction. But contributions over Rs 2.5 lakh would attract income tax on interest income.

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