The government has increased the deposit threshold limit to Rs 5 lakh per annum in the provident fund for which interest would continue to be tax-exempt. In simple terms, the interest on contribution to Provident Fund for up to Rs 5 lakh per annum will be tax-free. However, this would apply to those cases where no contribution is made by employers to the retirement fund.
Replying to a discussion on the Finance Bill 2021 in Lok Sabha, Finance Minister Nirmala Sitharaman said the tax-free limit is now being amended to a maximum of Rs 5 lakh per annum.
This exemption, however, is subject to the condition that the up to Rs 5 lakh contribution does not include the employer’s contribution beyond the statutory limit of up to 12 per cent of the basic pay.
“I think this (limit of Rs 2.5 lakh) was responded to even during the budget discussion. I had said that this Rs 2.5 lakh covers the majority of the people who invest money here. Through the government amendment that I am bringing now, I intend to raise this limit to Rs 5 lakh in those cases where there is no contribution by the employer to that fund,” she said.
Employees’ Provident Fund Organisation (EPFO) has more than six crore members. Both the employee and the employer contribute 12% of the employee’s basic salary and dearness allowance to the EPF. The current interest rate on EPF deposits is 8.50% per annum.
The new provision would come into effect from April 1.
Salient features of The Finance Bill, 2021
-Reduced compliance burden for senior citizens of age 75 years & above
-Tax incentives for Affordable Housing and Affordable Rental Housing Project
-Reduction in Time Limits of Re-opening of Assessment
-Setting up of Dispute Resolution Committee (DRC)
-Faceless Income Tax Appellate Tribunal (ITAT)
-Tax benefit for Start-ups
While presenting the Union Budget 2021, Finance Minister Nirmala Sitharaman announced interest in employee contributions to provident fund over Rs 2.5 lakh annually would be taxed from April 1 this year. “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 ₹2.5 lakh,” Sitharaman had said in her Budget speech.