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Explained: Govt notifies new EPF rules; here's how interest will be taxed on contributions

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The Central Board of Direct Taxes (CBDT) has recently notified new rules regarding the taxation of the interest on the excess Employee Provident Fund (EPF) contributions.

Explained: Govt notifies new EPF rules; here's how interest will be taxed on contributions
The Central Board of Direct Taxes (CBDT) has recently notified new rules regarding the taxation of the interest on the excess Employee Provident Fund (EPF) contributions.
According to this, the organisations will need to maintain two separate accounts, one for taxable contributions and another for non-taxable contributions from FY 2021-22 onwards.
So, what will be included in both the accounts?
The non-taxable contribution account (NTCA) will include the current year contribution (up to Rs 2.5 lakh), accumulated PF balance as of March 31, 2021, interest credited minus any withdrawals.
On the other hand, taxable contribution account (TCA) shall include -
(a) the contribution made in excess of the threshold (i.e. in excess of Rs 2.5 lakh of self contribution, Rs five lakh where the government does not contribute for central government employees i.e GPF contributions)
(b) interest on the above
(c) the sum of the above reduced by withdrawals made if any
The EPF statement that employees will receive is therefore expected to demarcate taxable and non-taxable portions. Earlier the statement included opening balances, month-wise employee/employer contributions and yearly interest credited.
To sum up, Sandeep Sehgal, Director- Tax and Regulatory, AKM Global, a tax and consulting firm said that the interest credited in the NTCA account will continue to remain exempt and the interest credited in the TCA account shall be taxable in the hands of the employee.
Will withdrawals be allowed from both accounts?
Talking about withdrawals, Archit Gupta, Founder and CEO, Clear said that clarity is still required on EPF withdrawals in these cases.
"It is not specified how withdrawals shall be allowed i.e. whether employees have a preference to withdraw from either of the contribution accounts," he said.
So, who will be impacted by the notified rule?
From taxpayers’ perspective, as per Sehgal, the new rule would impact only those having large salary packages to make such contributions.
Will the new rule pose any difficulty for the organisations?
According to Sehgal, the new rule will increase the compliance burden for organisations as it will be difficult to maintain separate details.