Home >Budget >News >Budget 2021: Interest on employee contribution to PF above 2.5 lakh a year is now taxable

The government in Budget 2021 has announced proposals to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds for high income employees.

"In order to rationalise tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of 2.5 lakh," the Budget document said.

"This restriction shall be applicable only for the contribution made on or after 01.04.2021."

Employee and employer contribution under the EPF Act is set at 12% of the salary. However you can voluntarily contribute more than this amount to VPF. And withdrawal of EPF after 5 years of continuous service is exempt from tax.

Aarti Raote, Partner, Deloitte India, said this budget seeks to tax the interest accruing on employee contributions made in excess of 2.5 lakh towards PF from April 1 2021. "The manner of taxation would be prescribed. This would include the statutory contribution as well as Voluntary contributions to PF. This is likely to jeopardise the most preferred investment avenue for many tax payers," she said.

In Budget 2020, she said, "the government put a cap of 7.5 lakh on tax free annual contributions to retiral funds like PF, superannuation and NPS. Employer Contributions as well as accretions in excess of 7.5 lakh would be subject to tax as a perquisite in the hands of the employee."

Nitin Baijal, director at Deloitte, said: "The Union Budget announced by Finance Minister had flavours of the past budgets i.e. provide relief to senior citizens and tax HNIs. Going forward senior citizens above the age of 75 years will not be required to to file a income tax return provided they only have pension and interest income and have fulfilled specified criteria. On the other hand interest earned on an accrual basis for employee contribution to PF above 2.5 lacs will now be taxable. Further, income received on ULIPs where annual premium is more than 2.5 lakh will now be taxable and treated at par with equity mutual funds."

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