The Budget has also exempted Provident Fund (PF) trusts for employee contributions above ₹2.5 lakh
NEW DELHI : The Union Budget 2021 on Monday made a provision capping the tax exemption for interest on Employees Provident Fund (EPF) and Voluntary Provident Fund (VPF).
The Budget has also exempted Provident Fund (PF) trusts for employee contributions above ₹2.5 lakh. Under existing provisions interest on EPF, VPF and exempted PF trusts is exempt from tax regardless of how large the contribution is. The new tax would thus apply on the interest earned on the contribution and not the contribution itself.
This would prevent high earners from enjoying tax exempt interest by contributing money to VPF. “Instances have come to the notice where some employees are contributing huge amounts to these funds and entire interest accrued/received on such contributions is exempt from tax under clause (11) and clause (12) of section 10 of the Act. This exemption without any threshold benefits only those who can contribute a large amount to these funds as their share,” said the Memorandum to the Budget.
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Employee and employer contribution under the EPF Act is set at 12% of the salary. However, you can voluntarily contribute more than this amount to VPF, without any upper limit. This created a loophole for highly paid and savvy employees to enjoy tax-free interest.
“Some employees contribute a higher sum to Provident Funds (both recognized Provident Fund and Central Government Provident Fund such as EPF) and enjoy exemption on entire interest without any limit. In the budget proposal, the FM has proposed to limit the exemption on the interest only to the extent of contribution to PF up to ₹2.5 Lakh per year,” said Prakash Hegde, a Bengaluru based Chartered Accountant.
