Updated: March 26, 2021 4:36:34 pm
While the government announced to limit the tax exemption on interest income for EPF contributions of up to Rs 2.5 lakh in its budget proposals last month, it moved to provide relief to government employees. Wednesday, the government introduced an amendment to the Finance Bill, 2021 where it proposed to double the cap on contribution from Rs 2.5 lakh to Rs 5 lakh for tax-exempt interest income, if the contribution is made to a fund where there is no contribution by the employer.
The amendment proposed in the Finance Bill read, “Provided further that if the contribution by such person is in a fund in which there is no contribution by the employer of such person, the provisions of the first proviso shall have the effect as if for the words ‘two lakh and fifty thousand rupees’, the words ‘five lakh rupees’ had been substituted.
This will be applicable for all contributions beginning April 1, 2021.
In the Budget proposal last month, the government had proposed, “to restrict tax exemption for the interest income earned on the employees’ contribution to various provident fund to the annual contribution of Rs 2.5 lakh.”
The decision to increase the cap on EPF contributions from 2.5 lakh to 5 lakh per annum, will benefit only a small section of top government officials who contribute higher amounts in general provident fund.
Sources say that there was a demand from senior government officials to raise the limit of contribution for tax-exempt interest income.
Government sources say that the amendment will offer respite only for contributions made to the General Provident Fund that is available only to government employees. So, the amendment essentially means that private sector employees will not see an enhancement in their PF contribution limit for tax benefit purposes and it will remain limited at own contributions of up to Rs 2.5 lakh.
Earlier, in February while justifying its move, the government stated that it had found instances where some employees were contributing huge amounts to these funds and getting the tax benefit. With an aim to exclude HNIs from the benefit of high tax-free interest income on their large contributions, the government proposed to impose a threshold limit of contribution at Rs 2.5 lakh for tax exemption.
On the move, Finance Minister Nirmala Sitharaman, last month, said: “This fund is actually for the benefit of the workers, and workers are not going to be affected by it…it is only for big ticket money which comes into it because it has tax benefits and also (is) assured about 8 per cent return. You find huge amounts, some to the extent of Rs 1 crore also being put into this each month. For somebody who puts Rs 1 crore into this fund each month, what should be his salary. So, for him to give both tax concessions and also an assured 8 per cent return, we thought this is probably not comparable with an employee with about Rs 2 lakh.”
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