The guideline has been issued following the introduction of a new provision in Budget 2021 that made interest on PF contributions above Rs2.5 lakh taxable. The two accounts will maintain taxable and non-taxable contributions separately to facilitate ease of calculation for the taxpayer.Shailesh Kumar, partner, Nangia & Co LLP, said the notification issued by CBDT has finally put an end to the ambiguity that arose during the Union Budget which did not clarify the manner in which the interest on the contribution above the threshold will be taxed.

As per the notification, the rule will kick in from financial year 2021-22, so contributions made till 31 March 2021 are non-taxable. If your account doesn’t get employer contribution, this limit is ₹5 lakh.

Sudhir Kaushik, co-founder and CEO, Taxspanner, said the second account comprising the taxable contribution will open automatically. “An account holder or an employer is not in a position to open this account on his own. By the law, the onus is on the PF authorities to maintain it."

The non-taxable account will contain the closing balance of your PF account as on 31 March 2021, contribution made within the threshold limit in 2021-22 and in the subsequent years and the accrued interest, as per the notification. It added that the tax to be paid will be calculated after deducting withdrawals made from the taxable account.

Kaushik said this move is aimed at rationalising taxation of PF to bring it on a par with other investment options. “This new rule is only the first step and I expect interest on PF to get completely taxable in the years to come. It cannot enjoy complete tax-free status while all the other options attract some form of taxation." In view of this, he added, investors should consider other investment alternatives, such as NPS, which is not only tax-friendly but also capable of yielding better returns compared to PF.