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Explainer: Provident Fund Contributions Above Rs 2.5 Lakh To Be Taxed

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Explainer: Provident Fund Contributions Above Rs 2.5 Lakh To Be Taxed
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Explainer: Provident fund contributions above Rs 2.5 lakh to be taxed

The government will tax Provident Fund (PF) contributions exceeding ₹ 2.50 lakh yearly – including the employee and the employer contributions, and the interest earned. The limit has been set higher for government employees at ₹ 5 lakh.

The centre announced the tax levy, citing several cases of abuse by wealthy and high net-worth individuals who have deposited vast sums of money into their PF accounts to avoid paying taxes on the income earned during the year.

That comes at a time when the retirement body Employees Provident Fund Organisation (EPFO) has reduced interest rates to the lowest in more than 40 years for the current financial year 2021-22 (FY 22).

What does the latest PF tax mean to you?

Under the new Income Tax (I-T) Rules, PF accounts are likely to be divided into taxable and non-taxable contribution accounts from April 1, 2022. With the new rules, the centre aims to prevent high earning people from taking advantage of government welfare schemes.

Any contributions above Rs 2.5 lakh into your PF accounts – including the employee, the employer contributions, the voluntary, personal and the interest earned – will be treated as taxable income.

“The tax on the PF contributions over Rs 2.5 lakh will be based on the income tax slab you come under and will be taxed accordingly,” said Kiran Kumar, an Independent Tax Consultant.

For more details, see: Provident Fund Contributions Above ₹ 2.50 Lakh To Be Taxed: 10 Points.

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