In the budget 2021, the Finance Minister of India, Nirmala Sitharaman, has proposed taxability of interest on various provident funds.
Currently, Clause (11) of section 10 of the Act provides for exemption with respect to any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 1925) applies or from any other provident fund set up by the Central Government.
In very simple words, as of now, PF contribution in your EPF account is exempted from any kind of taxation. However, most of you must also be aware that the government, every year, gives interest on PF contribution, which wasn’t taxable until now. But in the budget 2021, the government has proposed taxing the interest earned on PF contributions above Rs 2.5-lakh.
The government, while announcing the same, said that it has noticed that some employees contribute huge amounts to these funds and the interest received on them thus automatically is higher and untaxable. This is true mainly in the case of employees who contribute towards voluntary provident fund.
“An interesting change not covered in the Speech relates to taxation of interest earned by employees on their Provident Fund. Interest earned on annual PF contribution exceeding 2.5 lacs from April 2021 will now be taxable. In the 2020 Budget, the FM had capped the tax exemption on employers contribution to PF, NPS and Superannuation fund exceeding an aggregate of 7.5 lakh per annum,” Alok Agrawal, Partner, Deloitte India.
Currently, a PF contributor receives an interest rate of 8.5% per annum on their PF contribution. This interest rate was lowered from 8.65% in 2018-19 to 8.50% 2019-20.
The contribution towards EPF is 12% of the basic salary. However, one can increase their contribution up to 100% of the basic salary. Any such additional contribution is known as the Voluntary Provident Fund and also qualifies for tax benefit under section 80C.
“While last year’s change on taxation of Employer contributions would impact higher salalried employees, the change proposed in today’s Budget with respect to interest earned on employee’s contribution will have a much wider impact,” adds Agrawal. This means, going forward, the interest earned on your PF balance if the contribution exceeds Rs 2.5 lakh in a year will be taxable.