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Friday, February 26, 2021

Provident Fund: Interest income on PF contributions over Rs 2.5 lakh to be taxed

If a per contributes Rs 3 lakh per year in EPF, the interest on his contribution above Rs 2.5 lakh will be taxed.

Written by Sandeep Singh | New Delhi |
February 2, 2021 2:11:36 am
This restriction shall be applicable only for the contribution made on or after April 1, 2021.

In a decision that is set to impact provident fund (PF) contributions of individuals parking large sums of money into their funds, the government has proposed to tax the interest income on all PF contributions above Rs 2.5 lakh each year beginning April 1, 2021.

While currently there is no tax on interest earned on provident fund deposits, the Finance Bill, 2021 proposed to rationalise tax exemption for the income earned by high income employees. It 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. This restriction shall be applicable only for the contribution made on or after April 1, 2021.

What this means is that if an individual contributes Rs 3 lakh every year in EPF, then the interest on his contribution above Rs 2.5 lakh, i.e. on Rs 50,000, will be taxed at the marginal tax rate.

So, the interest income of Rs 4,250 (8.5 per cent on Rs 50,000) will be taxed at the marginal tax rate. So if an individual falls in the highest tax bracket of 30 per cent, the person will have to pay a tax of Rs 1,275.

For an individual contributing Rs 12 lakh in a year, the tax will be applicable on interest income on Rs 9.5 lakh (Rs 2.5 lakh deducted from Rs 12 lakh). In this case the tax liability would amount to Rs 24,225.

On this move, Finance Minister Nirmala Sitharaman 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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