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Explained: How interest in PF contributions above ₹ 2.5 lakh will be taxed

The government will tax the interest earned on Provident Fund (PF) contributions exceeding 2.50 lakh yearly. This comes at a time when the Employees Provident Fund Organisation (EPFO) has reduced interest rates to 8.1% for the current financial year 2021-22 (FY 22).

“The interest earned on the employee’s contribution to the provident fund account will be taxed if the contribution amount in a financial year exceeds 2.5 lakh. If there is no employer contribution in the provident fund account, the threshold will be 5 lakh a year,” said Archit Gupta, Founder and CEO – Clear. 

What does the latest PF taxation mean for you?

The CBDT has notified that organisations need to maintain two separate PF accounts. One of the accounts will be for taxable contributions, while the other will be for non-taxable contributions starting 1st April 2021. “The interest accrued on the contributions deposited in the taxable account in the EPF will be taxed,” said Archit Gupta.

He further explained the taxation on Provident Fund contributions above 2.50 Lakh with an example. For example, Sanju is a salaried employee, and he makes a contribution of 1.5 lakh in EPF and 1.5 lakh in VPF accounts during the FY 2021-22. The opening balance of the PF account as of 1st April 2021 is 20 lakh. The total contribution to the provident fund account during the FY 2021-22 is 3 lakh. Hence, 2.5 lakh EPF contribution will be credited to the non-taxable account, and 50,000 will be credited to the taxable account. The balance in the non-taxable account as of 31st March 2022 shall be 22.5 lakh (the opening balance as of 1st April 2021 is non-taxable), and in the taxable account shall be 50,000. Therefore, the interest of 8.5% applicable for FY 2021-22 on 50,000 shall be taxable in the hands of Sanju.

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