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Tax rules on GPF to kick in from April 1; all you need to know

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Tax rules on GPF to kick in from April 1; all you need to know

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Tax on GPF: FM Nirmala Sitharaman had proposed tax on interest of GPF in her 2021 Budget speech. CBDT has inserted Rule 9D in Income-tax Rules 1962 to tax interest earned on GPF.

Tax rules on GPF to kick in from April 1; all you need to know

Come April 1, 2022, the interest earned on the general provident fund balance will not remain exempted from tax. Union Finance Minister Nirmala Sitharaman had, in her Budget 2021 speech, proposed taxability of interest on general provident fund (GPF) in case the amount exceeds the threshold limit.

Subsequently, in August last year, the Centre amended the Income Tax Rules 1962 for the calculation of tax on interest of GPF. The August directive specified that the threshold limit is Rs 2.5 lakh for non-government employees and Rs 5 lakh for government employees.

Now, the department of revenue, in its recent notification (dated 15-02-2022), has asked government employees with GPF subscription of over Rs 5 lakh in FY 2021-22 to intimate about "the interest earned by them before salary bills for the month of February 2022 are prepared for deduction of TDS from the pay and allowances".

Who all will have to pay tax on GPF?

According to rule 9D of Income-tax Rules, 1962, which was inserted by the Central Board of Direct Taxes last year, all non-government employees — where the employer is contributing — with a provident fund amounting above Rs 2.5 lakh will pay tax on interest earnings of EPF. Similarly, all government employees — where the employer isn't contributing — with a provident fund amount above the threshold limit of Rs 5 lakh will pay tax on interest earnings of GPF.

How will the tax on GPF be computed?

Firstly, two separate accounts within the PF account will be maintained for FY 2021-22 onwards, for segregating the taxable and non-taxable contributions. Here's how the government notification explains taxable and non-taxable contributions:-

Non-taxable contribution account will be the aggregate of -- 

  1. i) Closing balance in the account as of 31st day of March 2021
  2. 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
  3. iii) Interest accrued on (i) and (ii)

    Taxable contribution account will be the aggregate of —

    1. i)Any 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
    2. ii) Interest accrued on (i)
    3. Breaking it down, all contributions made by employees until March 31, 2021, will be non-taxable contributions and all income from contributions in excess of the specified threshold limits made in FY2021-22 will be taxable.

      Interest will be calculated separately for non-taxable contributions and taxable contributions, adds the government notification.

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