Employees Provident Fund (EPF or PF) is one of the few retirement savings schemes available to the organized sector with significant tax benefits and sovereign-backed returns, which is typically higher than most other fixed-income products. Tax exemptions are available on the contributions made, on the accruals as well as on the withdrawals (this triple taxation benefit is known as EEE or Exempt, Exempt, Exempt scheme).

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With the objective to limit the tax benefits on PF to members who make high contributions, typically done through Voluntary Provident Fund (VPF), Budget 2021 had introduced the taxation of interest earned on employee contributions exceeding ₹2.5 lakh per financial year effective FY 2021-22. This applies only to contributions made by the employee and not the employer.

With the new set of rules, the Centre aims to prevent high earning people from taking advantage of government welfare schemes.

Here are the top five takeaways:

1) All existing PF accounts will be divided into taxable and non-taxable contribution accounts.

2) The non-taxable accounts will include their closing account as it stood on March 31, 2021, the Central Board of Direct Taxes (CBDT) had said. The CBDT frames policy for the I-T department.

3) According to official sources, the rules may come into effect from the next financial year, i.e. from April 1, 2022, onwards.

4) In order to implement the new tax on PF income from employees’ contributions exceeding ₹ 2.5 lakh per annum, a new Section 9D has been included under the I-T rules.

5) For taxable interest calculation, two separate accounts will be maintained within the existing PF account during the recently concluded financial year as well as all the preceding years, to assess the taxable as well as the non-taxable contribution made by a person.