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, if an individual's contribution to EPF exceeds Rs 2.5 lakh in a financial year, the person will be required to maintain two separate accounts beginning this fiscal i.e FY 2021-22.

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The new guideline has been issued following the introduction of a new provision in Budget 2021 that made interest on PF contributions above Rs 2.5 lakh taxable.

These two accounts, according to the notification, will maintain taxable and non-taxable contributions separately.

"For the purpose of calculation of taxable interest, separate accounts within the provident fund account shall be maintained during 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person," CBDT said.

"For the purposes of this rule, non-taxable contribution account shall be the aggregate of the closing balance in the account as on 31st day of March 2021, 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 accrued interest," it added.

It said that the tax to be paid will be calculated after deducting withdrawals made from the taxable account.

In order to rationalize tax exemption for the income earned by high-income employees, Budget 2021 had restricted tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of Rs 2.5 lakh.

First Published:Sept 2, 2021 3:57 PM IST