What is your annual contribution towards provident fund (PF)? Is it exceeding Rs 2.5 lakh annually – whether statutory or voluntary? If yes, then be prepared to pay tax on the interest earned on your PF amount as new rules come into play from 1 April. Union Finance Minister Nirmala Sitharaman announced in Budget 2021 that interest on employee contributions of over Rs 2.5 lakh a year to the provident fund would be taxed, starting from 1 April 2021. Announcing the restriction on tax exemption on PF contribution, the govt had set the limit for an annual contribution of Rs 2.5 lakh.
“To rationalise tax exemption for the income earned by high-income employees, it is proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of Rs 2.5 lakh,” Sitharaman had said in her Budget 2021-22 speech.
To simply it further, suppose if the employees’ contribution to the provident fund, including both statutory or voluntary, exceeds Rs 2.5 lakh per annum, then the interest earned on this excess contribution will become taxable. The revised rule will come into force on April 1, 2021.
Every month, at least 12% of an employee’s basic salary and performance wages is compulsorily deducted as provident fund, while the employer contributes another 12%.
Who will be affected by new PF tax rules?
The move is likely to impact people with high income. The government has said that it will affect less than 1 per cent of contributors. Salaried employees who use the Voluntary Provident Fund (VPF) to invest more than the mandatory 12 per cent of basic pay, will also be impacted. Finance Minister Nirmala Sitharaman had said the Employee Provident Fund (EPF) is aimed at the welfare of workers and any person earning less than Rs 2 lakh per month will not be affected by the Budget proposal.
Under the existing tax provisions, interest received from the employee’s provident fund (EPF) is exempt from tax. It is proposed that the interest earned on the EPF contributions (only employee contribution) above ₹2.5 lakh a year will now be taxable.
Can the tax on PF contribution be avoided?
If an employee’s mandatory PF contribution is more than Rs 2.5 lakh a year, then there is no scope, he/she has to pay the tax.
However, those who have voluntarily contributed more than 12 per cent of their basic pay through the Voluntary Provident Fund (VPF), can decrease their contribution and avoid the tax.
Meanwhile, the central board of trustees at Employees Provident Fund Organisation (EPFO) has recommended 8.5 per cent interest for subscribers during 2020-21, the government has said. In March last year, EPFO had lowered the interest rates on provident fund deposits to 8.5 per cent for 2019-20.