The Central Board of Direct Taxes (CBDT) under the Ministry of Finance has notified the Income Tax rules that will allow the government to collect tax from Provident Fund income generated from employee contributions. This will, however, be applicable to those making contributions of more than Rs 2.5 lakh a year.

According to the CBDT, the existing PF accounts will be split into two separate accounts in order to operationalise the new rule. It said that separate accounts within the PF account shall be maintained.

“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. 

Notably, the government had in the Finance Act of 2021 introduced a new provision that made the interest earned in the PF account on contributions above Rs 2.5 lakh annually. This applies to contributions made from April 1 this year.

According to the government's estimate, around 1.23 lakh high-income individuals make more than Rs 50 lakh a year in tax-free interest on average from their provident fund accounts.