EPF contributions exceeding Rs 2.5 lakh? You will now have two PF accounts

In the 2021 budget, it was announced that interest will be taxed on contributions to the Employee Provident Fund (EPF) and Voluntary Provident Fund (VPF) that exceed Rs 250,000 in a financial year. The Central Commission for Direct Taxes (CBDT) notified on August 31, 2021 about the imposition of interest on the excess contributions of the EPF. According to the notice, to calculate taxable interest, a separate account must be maintained in the provident fund account during and from and from the financial year 2021-22.

Individual contributions made before March 31, 2021 will be treated as non-taxable contributions. In addition, beginning in FY 2020-21, interest on both of these EPF accounts will be calculated separately.

These rules will take effect on April 1, 2022, according to the CBDT announcement. As a result, you will have to pay tax on the interest generated on excess contributions in FY 2021-22, and you will have to declare it in your following year’s income tax return filing.

Non-government employees are exempt from the Rs 2.5 lakh limit. The applicable threshold for government employees is Rs 5 lakh, which means that if contributions to EPF and VPF exceed Rs 5 lakh in a financial year, interest will be taxable in the employee’s hands.

The February 2021 budget announcement did not specify how taxable interest is calculated and how to separate it from the non-taxable portion. CBDT’s latest notice clarifies how taxable interest is calculated.

The following is what the notification says:

Calculation of taxable interest relating to contribution in a provident fund or recognised provided fund, exceeding specified limit.- (1)For the purposes of the first and second provisos to clauses (11) and (12) of section 10 , income by way of interest accrued during the previous year which is not exempt from inclusion in the total income of a person under the said clauses (hereinafter in this rule referred to as the taxable interest), shall be computed as the interest accrued during the previous year in the taxable contribution account.

(2) For the purpose of calculation of taxable interest under sub-rule (1), separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person.

(a) Non-taxable contribution account shall be the aggregate of the following, namely:- (i) closing balance in the account as on 31st day of March 2021; (ii) any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous years, which is not included in the taxable contribution account; and (iii) interest accrued on sub- clause (i) and sub- clause (ii), as reduced by the withdrawal, if any, from such account;

(b) Taxable contribution account shall be the aggregate of the following, namely:- (i) contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit; and (ii) interest accrued on sub- clause (i), as reduced by the withdrawal, if any, from such account; and