New PF Rules have been introduced for the year 2021 to which the changes can be seen from the first of April, 2021. Changes shall depend upon the basic salary earned by every employee.
The proposal to tax interest earned on provident fund (PF) contributions has left many employees perturbed. According to the announcements made by the Union Finance Minister, Nirmala Sitharaman, the earnings may go taxable only if the interest earned on employee’s contribution is above Rs. 2.5 lakh per year that too if carried out manually by the employee.
This move was taken by the central government so as to potentially impact employees in high income bracket or employees making large voluntary EPF contributions.
Taxes shall not run upon those employees who earn a basic salary of Rs. 1.75 lakh per month approx. so that the interest is not earned in PF. This means the interest earned on contributions in case of those who earn above Rs. 2.5 lakh per annum will be taxable only if one’s tax is comparable to the taxed income that is fixed in a bank account.
The point of worrying about your contributions because in case these contributions surpass the cut-off limit of Rs. 2.5 lakh in a year, there will be less hope left for any employee to earn a tax-free return from his own PF balance. To explain you with an ease, The Business Head to Compliance and Payroll Outsourcing from TeamLease services, Prashant Singh explains how those these PF rule for 2021 shall work. He explains that generally employees having basic salary up to approximately Rs. 1.75 lakh per month would not attract tax on their interest earnings on PF. Those who earn beyond that Rs 1.80 lakh or more as basic salary per month would get impacted. Also, those who contribute additional in VPF and their total contribution exceeds Rs 2.5 lakh, the interest earnings would also get taxed.
The tax will be on the interest earned on PF amount exceeding Rs 2.5 lakh in a year.
As per the Finance Bill, the interest income may be received while on the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of the contribution made by the person exceeding two lakh and fifty thousand rupees in a previous year in that fund, on or after 1st April 2021.
Two reasons or say, the contributions that might surpass Rs. 2.5 lakh. Therefore, to this the PF tax calculation will be as follows:
Based on Basic Salary
Based on your voluntary contribution in voluntary provident fund
12% of Basic salary generally goes into the PF account each month. For an instance, if a Basic Salary is around Rs. 1.75 lakh (just the basic salary and not your total monthly income), the monthly contribution shall be Rs 20833 approximately, aggregating it as Rs 2.5 lakh each year. This is the first reason why the contributions might effectively surpass Rs. 2.5 lakh against the introduction to the new PF rule for 2021.
Before youstart to panic regarding your PF, let us tell you that nothing is going to actually affect you. Your salary is not hunt nor they shall be abducted. It is just that the interest earned on the entire PF balance shall remain tax-exempt. The new PF contribution rules will not impact an employee whose monthly contribution is below Rs 20,833. However, if your Basic Salary is above Rs 1.75 lakh, there’s no escaping tax on interest earned. The only way out is if your employer provides you with an option to divert contribution to NPS.
According to the second reason called ‘Based on your voluntary contribution in voluntary provident fund’, Some employees contribute more than the mandatory 12 per cent towards PF. To clear the fact, the PF rules allow the contribution that is not necessarily a compulsion for any employer to get equalised with the additional contributions. They do so to earn a safe and tax-free return on their additional contributions.
For instances, for someone with a Basic Salary of Rs 1 lakh, the monthly contribution is Rs 12,000 which is about Rs 1.44 lakh in a year. The employee contributes an additional 12 per cent into VPF taking the total contribution to Rs 2.88 lakh in the year. In such a case, the interest earned on Rs 38,000 (Rs 2.88 lakh less Rs 2.50 lakh) will now get taxed.