Presently, any payment from a provident fund set up under the Provident Funds Act, 1925 or any recognised fund set up by Central Government is exempted under section 10(11).
New Delhi: Union Budget 2021 has proposed to levy income tax on interest earned by an employee towards his/her contributions to the provident fund of over Rs 2.5 lakh per annum, starting from 1 April. “In order 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,” FM Nirmala Sitharaman said in her Budget 2021 speech.
Know if tax on PF interest also cover contribution to PPF account?
Presently, any payment from a provident fund set up under the Provident Funds Act, 1925 or any recognised fund set up by Central Government is exempted under section 10(11). Similarly, any interest accrued/received on the accumulated balance of such provident funds is exempt under section 10(12).
The implication of the amendment
Aarti Raote, Partner, Deloitte India, explained:
“One amendment that has impacted most highly paid employees is the taxation of interest accruals on annual employee contributions to the provident fund in excess of INR 250,000 from April 1, 2021. The PF is considered as an old age security kitty by many and it is one the most favored investment avenue considering the assured rate of return, definitive secured benefit, lump sum withdrawal on retirement, and zero taxation on withdrawal provided the employee has been a contributing member of the fund for five years or more. This is the reason why many employees seek to contribute a higher amount voluntarily towards PF in addition to the mandatory contribution.”
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“This amendment would impact employees having a PF salary (i.e. Basic + DA+ Retaining allowance) in excess of INR 20 lakhs and if we presume that this is at least 50% of the employee’s total remuneration, then his total salary would be in the range of INR 40 lakhs or more. Hence such employees would need to face the tax cut on interest earnings going forward. Thus while the PF scheme is still attractive for the lower-income group, it does take off the sheen for the higher income group,” she stated.
Will it cover contribution to the PPF account?
After reading the Budget document, it appears that tax will apply to the interest earned on contributions made to Employees’ Provident Fund (EPF), Voluntary Provident Fund (VPF) as well as Public Provident Fund (PPF). However, tax experts have clarified that there are separate limits for EPF/VPF and PPF i.e. contributions to PPF and EPF/VPF will not be aggregated for the purpose of calculating the Rs 2.5 lakh limit.
Kush Vatsaraj, Associate, TP Ostwal & Associates LLP said:
“The proposed amendment will not affect anyone making contributions to PPF accounts since there is already an annual cap of INR 1.5 lakh. Salaried persons who make contributions to their PF scheme in excess of INR 1.5 lakhs per annum will also not be affected since they can only claim a deduction of up to INR 1.5 lakh under section 80C, and the excess contribution is already taxable as salary income.”
“However, it is seen that high-salaried employees are making huge contributions to their PF accounts, even though their contributions are taxable beyond Rs 1.5 lakh per annum (under section 80C). This is because the interest accrued on the entire contribution is still exempt. This amendment seeks to reduce such disproportionate benefit, and going forward even the interest income earned on the amount contributed in excess of Rs 2.5 lakh will be taxable. To reiterate, this amendment applies only to interest income on the amount of contribution in excess of Rs 2.5 lakh by salaried persons as part of their PF scheme and does not affect PPF contributions,” he explained.
