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PF contribution taxable if the interest earned is over Rs 5 lakh

On Tuesday the government increased the deposit threshold limit, for which interest would continue to be tax-free, to Rs 5 lakh per annum in provident fund (PF) account. This would be applicable to those cases where no contribution is made by employers to the retirement fund.

Finance Minister Nirmala Sitharaman, in her Budget 2021 speech, had suggested that interest on employee contributions to provident fund over Rs 2.5 lakh per annum would be taxed from April 1, 2021. FM in her speech had said, “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.”

The progress is aimed at taxing high-value depositors in the Employees Provident Fund. At least 12% of an employee’s basic salary and performance wages is imperatively decreased as provident fund, while the employer contributes another 12%. Those who earn more than Rs 20.83 lakh a year will invite his or her interest on EPF contribution being taxed.

In her reply to the debate on the Finance Bill 2021 in the Lok Sabha on Tuesday, Sitharaman increased the deposit threshold limit to Rs 5 lakh per annum in the provident fund for which interest would continue to be tax-exempt if there is no employer contribution.

If employees’ contribution to PF on or after 1 April 2021 surpasses Rs 5 lakh in any year, interest earned on contribution over Rs 5 lakh shall be taxable, and this would be applicable to those cases where no contribution is made by employers towards PF. The salaried employees who use the Voluntary Provident Fund to spend more than the mandatory 12% of basic pay, will also be impacted by this move, but for the high-income salaried individuals, there will be a limited impact.

The Finance Bill, which gives effect to tax suggestions for 2021-22, was passed by voice vote. The bill was passed after the approval of 127 revisions to the recommended legislation. FM in her reply stressed that the tax on interest on PF contribution affects only 1 percent of the contributors, and the remaining are not affected as their contribution is less than Rs 2.5 lakh per annum.

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