Recently, the Finance Minister of India, Nirmala Sitharaman, in her budget 2021 speech, announced that from April 1, 2021, the government will charge interest earned on PF contribution.
In very simple words, currently, every year, the goverenemnt gives an EPF subscriber approx an 8.50% interest rate on their PF contributions. Until now, the PF interest that you used to earn wasn’t taxable. However, as per the new rules, the PF interest, that you earn yearly, will be taxed.
But there is a catch
Many people, as of now, are thinking that their earrings will come down. But that’s not the case. If you read the new rules carefully, you would know that the new rules only apply to those whose contributions to PF is above Rs 2.5 lakh per annum.
Happens, many people and even media houses didn’t read the rules carefully and may have informed you wrong. But finally, here’s the truth:
If your contribution exceeds Rs 2.5 lakh in a year, the advantage of earning a tax-free return on the entire PF balance will be lost now. “Employees having basic salary up to approximately Rs 1.75 lakh per month would not attract tax on their interest earnings on PF. Those who earn beyond that Rs 1.80 lakh or more as basic salary per month would get impacted. Also, those who contribute additional in VPF and their total contribution exceeds Rs 2.5 lakh, the interest earnings would also get taxed,” says Prashant Singh, Business Head – Compliance and Payroll Outsourcing, TeamLease Services.
The tax will be on the interest earned on PF amount exceeding Rs 2.5 lakh in a year. The Budget 2021 Bill states – “The interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of the contribution made by the person exceeding two lakh and fifty thousand rupees in a previous year in that fund, on or after 1st April 2021.”
Also, there are two ways in which your PF contribution can exceed the 2.5 lakh mark:
- The first would be based on Basic Salary
- and secondly based on your voluntary contribution
Based on Basic salary: If you know, mostly 12 per cent of your ‘Basic Salary’ makes your PF contribution each month. So, if your monthly basic salary (basic salary is not the whole monthly income) is Rs 1.75 lakh your yearly contribution to the PF will be approx Rs 20833, which means less than Rs 2.5 lakh a year. Thus, the interest rate you earn on your salary won’t be taxable. However, if your monthly basic salary is above 1.75 lakh then interest will be taxed.
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Based on voluntary contribution: Some employees choose to contribute more than the mandatory 12 per cent towards PF to earn a higher tax-free return. For example, one earning a Basic Salary of Rs 1 lakh, the monthly contribution is Rs 12,000 which is about Rs 1.44 lakh in a year. However, if the employee contributes an additional 12 per cent into VPF this will take their contribution to Rs 2.88 lakh, which will be taxed.
