Last Tuesday, the Finance Minister Nirmala Sitharaman had introduced new Income Tax rules on Provident Fund (PF) savings. Income on PF contributions of more than Rs 2.5 lakh (for private employees) and of more than Rs 5 lakhs (for government employees) will now be taxed. The taxation is to begin this fiscal year. There will be two separate accounts within the PF account for taxable and non-taxable contributions.
Tax on PF Contributions: Introduction
Until now, all income on PF savings was exempt from taxation. This was because these savings were considered a support after retirement. However, according to the Finance Minister, it was being misused by some individuals. Since no tax was charged on PF savings, it was used by people to deposit as much as Rs 1 crore every month.
Before this, in 2016 too, the government had attempted taxing PF savings.
Which PF Accounts Shall Be Impacted?
PF accounts which are managed by Employees’ Provident Fund Organization (EPFO), and the General Provident Fund (GPF), shall be impacted. The PF accounts managed by companies through exempt EPF trusts, Public Provident Fund (PPF) and National Pension System (NPS) shall not be impacted.
When Will the Taxes be Deducted?
As of now, there is no clarity on how the taxes will be deducted. It is yet to be seen if this happens at the time of retirement, withdrawal, or every year.
What You Need to Do?
As of now, there is nothing for a PF account holder to do. If your employee contribution is more than Rs 20,833.33 a month into EPF (Rs 41,666.66 for PF accounts with no employer contribution), you should start planning if any voluntary contribution from your side should continue. You should also keep an eye on the developments around this so because there is still not much clarity about the way your PF savings will be taxed.
