As per the Union Budget 2021, taxes are applied to those employees who had emanated their excessive contribution into any EPF account of more than 2.5 lakh Indian Rupees.
During the announcement of Union Budget 2021, Finance Minister Nirmala Sitharaman had clearly stated the purpose of taxation upon the provident funds. The instruction inclined directly towards the interests enacted over employee’s benefactors that supposedly seem higher each year from the margin of 2.5 lakh Indian Rupees. This taxation shall be applied from the start of the month of April 2021. Annual contributions up to Rs 2.5 lakh has been kept as the deposit limit for which interest is tax exempt.
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.
Note that every month, at least 12% of an employee’s basic salary and performance wages is compulsorily deducted as provident fund, while the employer contributes another 12%. With this taxation, the government wants to curb high income earners from self-contributing more to their PF accounts.
The Memorandum Explaining Provisions of Finance Bill, 2021, says there are instances of some employees contributing huge amounts to PF, and the entire interest accrued being 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,” said the memorandum.
Besides the official announcement, Finance Minister Sitharamanalso explained a better idea to rationalise the tax exemptions. She suggested to divide the interests to different PFs, rather than sticking to just one provident fund. This way each fund will have a limited and restricted contribution of 2.5 lakhs per annum. This method is applied to all those whose income is higher than the median ranged employees.
This move will affect mostly the high-income earners and High Net-worth Individuals (HNIs). Under the existing tax provisions, interest received/accrued from employee’s provident fund (EPF) is exempt from tax. The new rules will potentially impact employees in high income bracket or employees making large voluntary employee provident fund contributions.
It is necessary to note that the new provision shall be accounted only to the employee’s contributions rather than the aggregate contribution maintained to the fund carried each year.
Added by Sitharaman, tax returns shall be about 8% as the employee’s tax benefit, as it is assured under the tax ambit.
Aside from high-income earners, salaried employees who use Voluntary Provident Fund (VPF) to invest more than mandatory 12% of basic pay, will also be impacted.
A large tax-free interest accrual which is not taxed on withdrawal either, is now being rationalised and will mostly impact those in the high-income bracket. The method of calculation will be specified later as the taxation details have not yet been shared by the government.
Meanwhile, around 4 million subscribers of the government’s pension scheme Employees’ Provident Fund (EPF) are yet to receive interest payments even after one-and-a-half months of the government announcing the payout for 2019-20. The delay occurred due to a mismatch of KYC or identification of the employees at the employer’s end. The field offices of the Employees’ Provident Fund Organisation (EPFO) are reaching out to the employers