New EPF tax rules on interest income: Rule 9D, 2 separate accounts for taxable and non taxable contributions

The new income tax rule imposes a tax on interest earned from EPF, but without affecting the tax liability of the common working people.

Government cuts tax benefit limits on EPF interest income

The Central Board of Direct Taxes (CBDT) has disclosed the new income tax rules that seek to tax the income on interest earned from one’s provident fund (EPF). However, interest on EPF will be taxable only in the case of those making contributions above Rs 2.5 lakh in a year. CBDT has said that existing EPF accounts will split into two separate accounts to ease the operationalisation of the new rule. This new rule will be applicable from 1 April 2022.

The Income Tax Rules 2021 (25th amendment) notifies that the separation of EPF accounts will be done for the previous year (2021-2022) and prior years. This separation will be used to calculate the taxable and non-taxable contributions made by a person. The government estimates that around 1,23,000 high-income persons are earning over Rs 50 lakh on average as tax-free interest income. 

In her budget speech, Finance Minister Nirmala Sitharaman put a cap on the tax-free limit on the interest income from EPF. She said that the government discourages the parking of surplus funds in EPF accounts, particularly since EPF is supposed to be the retirement fund for the common worker and not a vehicle for earning tax-free interest.

What does rule 9D say?

Rule 9D has been newly inserted into the Income Tax Rules, 1962. It specifies that separate accounts will be maintained within the EPF account to segregate taxable and non-taxable contributions to EPF. In EPF accounts with employee contribution, the threshold limit for contribution is Rs 2.5 lakh. For accounts with no EPF contribution, the limit is Rs 5 lakh.

Related: 8 Situations in which you can withdraw your PF early

Why has this rule been introduced?

EPF provides tax benefits on contribution; interest as well as withdrawal. The government noticed instances where individuals are depositing hefty amounts to earn these tax benefits. The idea behind this change is to exclude high net worth individuals from tax exemption. EPF is for the benefit of the workers and their income is not taxed by this rule. 

How will it be taxed in subsequent years?

If you contribute Rs 7.5 lakh to EPF in a year, Rs 5 lakh will be taxable for the financial year as well as in all subsequent financial years. If you contribute the same amount in the subsequent years, your taxable contribution would accordingly increase, from Rs 5 lakh to Rs 10 lakh, 15 lakh, 20 lakh, and so on. 

If you are earning an interest of 8.5% on your EPF contributions, it will be reduced by the tax rate as per your income slab. For those individuals falling in the highest tax slab, the actual interest income would be at 5.85% only.

Related: Changing jobs? Your PF balance will follow you automatically

Who is affected by the new rule?

Rule 9D will affect several stakeholders – employers, employees, EPFO, and EPF trusts. Employees will have to check the rate at which the tax on interest income has been withheld. A difference in the rate of tax would mean that you will have to either pay additional tax or claim a refund. 

EPFO will see changes in its statement format, as the contribution and the tax rate have to be monitored. It will have to provide the information back to the IT department based on PAN details. Employers, on their part, will have to check the calculations to ensure that taxable and non-taxable EPF of employees are accounted for correctly.


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