• The government has decided to split existing Provident Fund (PF) accounts into two separate accounts in order to operationalise the new tax on PF income arising out of employee contributions exceeding ?2.5 lakh a year.
• The Finance Ministry notified new Income Tax rules to this effect on Tuesday, but experts said this could prove to be an administrative nightmare for the Employees’ Provident Fund Organisation (EPFO) and a few thousand employers who manage their workers’ EPF savings in-house.
• “For the purpose of calculation of taxable interest…, separate accounts within the provident fund account shall be maintained during the previous year 2021-2022 and all subsequent previous years for taxable contribution and non-taxable contribution made by a person,” according to the Income-Tax (25th Amendment) Rules, 2021.
• Accordingly, all EPF accounts will have to be bifurcated into a taxable and non-taxable contribution account, with the latter including their closing account balance as on March 31, 2021, any contributions made thereafter that are “not included in the taxable contribution account” and annual interest accrued on these two components.

      24.77 crore accounts

• To put that in context, the EPFO had 24.77 crore members with EPF accounts, of which 14.36 crore members had been allotted Unique Account Numbers (UAN) as of March 31, 2020.
• About 5 crore of these members were active contributors into their EPF accounts during 2019-20.
• The calculation of taxable interest for the year shall be computed as the interest accrued during the previous year in the taxable contribution account where all contributions over ?2.5 lakh a year would be parked.
• The same threshold is 5 lakh for PF accounts where employers do not contribute, but most EPF accounts, by definition, usually include matching contributions from employers and employees of 12% of monthly salary.
• This notification ends some of the ambiguity which arose with the introduction of taxation of interest on PF contributions above ?2.5 lakh, noted Shailesh Kumar, partner at Nangia & Co. LLP, adding that segregating the taxable and non-taxable contributions to PF along with the interest on them shall provide some convenience for the calculation of tax liability.