On the plain reading of the budget documents, it appears that tax will apply to the interest earned on contributions made to Employees’ Provident Fund (EPF), Voluntary Provident Fund (VPF) as well as Public Provident Fund (PPF).
has proposed to levy income tax on interest earned by an employee/person on his/her contribution in excess of Rs 2.5 lakh in a financial year to a provident fund. On a plain reading of the budget documents, it appears that tax will apply to the interest earned on contributions made to Employees’ Provident Fund (EPF), Voluntary Provident Fund (VPF) as well as Public Provident Fund (PPF). However, tax experts have clarified that there are separate limits for EPF/VPF and PPF i.e. contributions to PPF and EPF/VPF will not be aggregated for the purpose of calculating the Rs 2.5 lakh limit.
Effectively, this would mean that an individual will still enjoy tax exemption on the interest earned on PPF contributions because a person is not allowed to contribute more than Rs 1.5 lakh per financial year to PPF as per current laws. Therefore, although a cap of Rs 2.5 lakh is applicable independently to PPF contribution for claiming exemption on interest but this cap is, at present, not relevant because of the Rs 1.5 lakh limit on contribution to PPF itself.
However, in case of EPF and VPF contributions, the total of contributions to both – EPF and VPF- should not exceed Rs 2.5 lakh in a financial year to enjoy tax exemption on the interest earned on EPF and VPF contributions. If an employee’s total contribution to EPF and VPF together in a financial year exceeds Rs 2.5 lakh in a financial year, then the interest earned on the excess contribution will be taxable in the hands of an employee. The newly proposed tax rules will come into effect from April 1, 2021, once they are passed by the parliament.
Vinay Joy, Partner, Khaitan & Co says, “Technically the budget proposal would apply to both the EPF and the PPF, although this would apply independently to both and not in relation to an accumulation of the dues in both of them. The budget indicates that a new proviso will be introduced in both sections 10 (11) (which deals with the PPF) and 10 (12) (which deals with EPF) of the Income-tax Act,1961. The wording of the change suggests that the exclusions provided in those sections would apply in relation to amounts contributed “in that fund”. This implies that each of the funds would be treated separately and the intent is not to aggregate the amounts lying in the PPF together with those accumulated in the EPF and then apply the threshold of 2.5 lakhs. Therefore, if the contribution by an individual in a year to the PPF is 1.5 lakhs while that in the EPF is 3 lakhs, then it would only be the interest on the 50,000 (the excess contributed to the EPF over the 2.5 lakh threshold) which would be considered as taxable income for the employee and not the interest on 2 lakhs (being the aggregate amount in excess of the 2.5 lakhs threshold when combining the PPF and the EPF).”
Corroborating the view, Shalini Jain, Tax Partner – People Advisory Services, EY India says, “Contribution to PPF is covered under Section 10(11) of the Income-tax Act which cannot exceed Rs. 1.5 lakh during the year. Therefore, interest accumulated on PPF balance will still remain tax-free as contribution (to PPF) during any financial year will not exceed Rs. 2.5 lakh as prescribed by the amendment in Finance Bill 2021. Moreover, contribution to each provident fund needs to be seen separately and not in aggregate.
Jain adds: “For example, an employee contributing Rs. 2 lakh to EPF and Rs. 1.5 lakh to PPF during a year will still enjoy the tax-free status of the interest income.”
Alok Agrawal, Partner, Deloitte Haskins & Sells LLP says, “For non-Government employees, the provident fund contributions are made to “recognized Provident Fund” and exemption for withdrawal of this accumulated balance is covered under Section 10(12) of the Income Tax Act. When such employees make a contribution to their Public Provident Fund (PPF) account in order to avail of the income tax benefits (i.e. tax-exempt interest and deduction under Section 80C), exemption for withdrawal of this balance is covered under Section 10(11) of the Income Tax Act. The Finance Bill as per 2021 Budget proposals have introduced a cap in each of the above provisions for exemption of interest earned on the above employee contributions over Rs 2.5 lakh per annum. So where an employee contributes Rs 3.5 lakh (through his employer) into his PF account in a year and makes a contribution of Rs 1.5 lakh into his PPF account (through their bank/post office), only interest attributable to the excess PF contribution of Rs 1 lakh will be taxable and there will be no impact on the PPF interest as these are separate limits for each fund.”