‘Interest on PF contributions of over ₹2.5 lakh must in I-T filing’

CBDT’s Mody says interest calculable on annual basis, should be taxed that year

Employees making contributions of more than ₹2.5 lakh a year into their Provident Fund (PF) accounts, will have to include the interest attributable to the investments exceeding ₹2.5 lakh in their annual income starting 2021-22 and file tax returns accordingly, Central Board of Direct Taxes (CBDT) chief PC Mody told The Hindu.

The Union Budget has proposed tax on interest income on PF contributions exceeding ₹2.5 lakh a year. Finance Minister Nirmala Sitharaman said on Monday that some people were investing as much as ₹1 crore each month into PF and suggested it was unfair that they get tax concessions as well as an assured return.

When asked how the taxation proposal would be implemented — at the time of retirement or withdrawal from the PF account, or by deducting tax at the time of crediting interest — Mr. Mody said that though PF account holders may have the option to withdraw or not, the determination of the tax was very clear.

“The interest portion is calculable on a year-to-year basis, and that will go on an accrual basis, so that is taxable on your calculations in that particular year. If I am contributing into the GPF [General Provident Fund for government employees], I know how much interest I have received that year. That should be brought to tax in that very year. That is very simple, it’s just like bank interest,” he said.

“So, at the time of filing tax returns, you have to factor in the interest which you are receiving on that. For you and me, it is the same. It is for both the government employee and private sector employees,” Mr. Mody explained.

Analysts said the change throws up uncertainties in tax treatment and administration.

“It will result in implementation difficulties given the design of Employees’ PF (EPF),” said Amit Gopal, principal, Mercer Consulting. “PF being an interest-bearing product with annual compounding, tracking interest across years that is attributable to only employee contributions will be a challenge,” he added.

“Further, the input mechanism to ascertain interest credits is not very efficient due to delays in rate declarations. These could also impede seamless implementation of this proposal,” he pointed out.

A similar tax has been introduced on income from annual premium payments exceeding ₹2.5 lakh into unit-linked insurance products, but that provision clearly states that maturity benefits would be subjected to capital gains tax.

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