Can anyone explain the new Income Tax provision on PF contributions, which has been announced in the recent Budget 2021?

Hi all, Can anyone explain the new Income Tax provision on PF contributions, which has been announced in the recent Budget 2021?
1. Whether interest earned on PF contributions (both employee & employer or employee only) of more than Rs.2.50 lakhs is taxable ? OR
2. Interest earned more than Rs.2.50 lakhs is taxable?

The Government seeing the gradual increase of Crorepati PF Account holders has made a pathbreaking action and has proposed to tax the employees’ provident fund (EPF), albeit only the interest income on contributions exceeding Rs 2.5 lakh in a year. In the recent Budget proposals, the government has proposed that tax exemption will not be available on interest income for the year on all contributions to provident funds exceeding Rs 2.5 lakh. But this will not affect their existing corpus or the aggregate annual interest on that.

The Finance Ministry on Tuesday notified new Income Tax rules to implement a fresh tax on Provident Fund (PF) savings. In her Budget 2021-22 speech, Finance Minister Nirmala Sitharaman had proposed taxing the income on PF contributions of over ₹2.5 lakh a year which was later enhanced to ₹5 lakh for PF accounts where employers make no contributions.
For calculation of taxable interest relating to contribution in a provident fund or recognised provident fund, exceeding the specified limit, a new Rule 9D has been added. The rule requires all PF accounts to be split into separate accounts – one with the taxable contribution and interest earned on that component, and another with the non-taxable contribution that shall include the closing balance of the PF account as on March 31, 2021 and all fresh non-taxable contributions and interest thereon.
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The rule is a little confusing for most people, so I suggest you work like this :

- Make 2 accounts for each person in PF
- One account will have your old balance before 31-3-2021 (when the new rules were applied)
- Second account will have excess / taxable balances.

From the PF contribution for the current year, put amount less than ₹ 2.5 lakhs in the first account
the amount in excess will go into the second account.

Interest will be applied at the end of the year on both account balances at the same rate. The interest in the second account will be subject to Income Tax at normal slabs. If it is a private approved PF trust, they will deduct TDS. The balance you will have to pay.

Hope this helps you understand how the provisions now work