From April 1 all provident fund (PF) accounts, both existing and new ones will be divided in two parts. The announcement was made last year in September where government notified new Income Tax rules. Under changes, the PF accounts were to be split in two parts. IT Department will be able to tax provident fund contributions of more than 2.5 lakh annually. Under new Income Tax rule, government will prevent people having high income from taking benefits of welfare schemes.

The Income Tax (25^th Amendment) Rule, 2021 said, “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.”

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According to government there are more than 123,000 people that have income more than 50 lakhs a year. They get tax free interest from their provident fund accounts. Ministry of Finance has taken this decision because PF Accounts were becoming a surplus parking for high income earners when it is supposed to be retirement fund of a common man.

Let’s understand this division in 5 bullets;

All existing provident fund accounts will be divided in two categories; taxable and non-taxable contribution accounts.
The rules will come in effect from new financial year which is April 1, 2022.
All the non-taxable accounts will include their closing account as it stood on March 31, 2021.
A new section 9D has been introduced under new Income Tax rules. This section will be used collect tax on PF income from employee contribution if it exceeds more than 2.5 lakhs in a year.
To calculate taxable interest, there will be two separate accounts. These accounts will be within existing PF account to assess taxable and non-taxable contributions made by an individual. The CBDT will assess the record of FY 2021-22 and preceding years as well.