Interest accrued on PF contributions by employees of more than `2.5 lakh annually to be taxed
The Budget has proposed that the interest earned on employees’ annual contribution to provident fund over `2.5 lakh will be taxable. It will be applicable only for the contribution made on or after April 1, 2021.
The government has underlined that some employees are contributing huge amounts to provident funds as the entire interest received on contributions is exempt from tax under clause (11) and clause (12) of Section 10 of the Income Tax Act. “This exemption without any threshold benefits only those who can contribute a large amount to these funds as their share,” the Budget documents say.
The Budget has proposed to insert proviso to clause(11) and clause (12), providing that the provisions of these clauses shall not apply to the interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of contribution made by the person exceeding `2.5 lakh in that fund, on or after April 1, 2021.
Amarpal S. Chadha, tax partner and India Mobility leader, EY, says realising there is a particular section of taxpayers who avail tax benefits in form of exemption on interest accrued from contributions made to recognised provident fund and public provident fund, the government has proposed to tax interest accrued on contributions exceeding `2.5 lakh per annum. “This may have wider implication as a large population of taxpayers would have planned this as an investment for their retirement. Given these changes, taxpayers would be required to rework their investments plans, in order to continue building their retirement corpus with minimum tax impact.”
Last year, the government had provided an aggregate monetary cap of `7.5 lakh on tax-free employers’ contributions to recognized provident fund, approved pension scheme or approved superannuation fund and corresponding annual accretion (being interest or dividend or any other similar amount) in respect of such employers’ contributions to these funds. The objective of putting this monetary cap was to restrict tax benefit of such contributions to employees in high salary income levels, who could set aside a high amount from their salary to such tax-free funds.
Says Rakesh Nangia, chairman, Nangia Andersen India, “With proposed amendment, employees earning interest on Provident Fund on annual contribution exceeding `2.5 lakh would be required to pay tax on such excess contribution, as per rules to be notified later. While proposed amendment may not have any impact on employees earning moderate salary levels up to around `20 lakh (assuming contribution percentage of 12% per annum of basic salary), for other employees earning higher salary may need to pay tax on such income.”
Employee and employer contribution under EPF Act is set at 12% of basic and DA. However, an employee can increase voluntarily contribution up to 100% of basic salary and DA and get tax deduction of up to `1.5 lakh under Section 80C.