Finance minister Nirmala Sitharaman announced in Budget 2021 that interest on employee contributions to provident fund of over ₹2.5 lakh per annum would be taxed, starting from 1 April. Up to ₹2.5 lakh has been kept as the deposit limit for which interest is tax exempt, finance minister said. At least 12% of an employee’s basic salary and performance wages is compulsorily deducted as provident fund, while the employer contributes another 12%.
“As paying tax free interest on provident fund becomes more and more unsustainable, the government wants to curb high income earners from self contributing more to their PF accounts,” said Archit Gupta, founder and chief executive officer, ClearTax.
This move will affect the high-income earners and High Net-worth Individuals (HNIs). Anyone who earns more than ₹20.83 lakh a year will attract his or her interest on EPF contribution being taxed. “It may be noted that the new provision only takes into account employees’ contribution and not the total contribution to the fund during any year,” said Gaurav Saraf, partner, VPTP & Co.
“Under the existing tax provisions, interest received/accrued from employee’s provident fund (EPF) is exempt from tax. It is proposed that the interest earned on the EPF contributions (only employee contribution) above ₹2.5 lakh a year will now be taxable. This could potentially impact employees in high income bracket or employees making large voluntary employee provident fund contributions,” said Parizad Sirwalla, partner and head, global mobility services- Tax, KPMG in India.
“The big-ticket money which comes into the fund and gets tax benefit as well as assured about 8% returns that would come under the tax ambit,” finance minister said.
The salaried employees who use Voluntary Provident Fund to invest more than mandatory 12% of basic pay, will also be impacted. “A large tax free interest accrual which is not taxed on withdrawal either, is now being rationalised and will mostly impact the high income bracket,” Gupta added.