New PF tax: Interest on PF will be tax-free for up to ₹5 lakh, if employers don’t contribute

Finance minister Nirmala Sitharaman on Tuesday increased the deposit threshold limit to ₹5 lakh per annum in provident fund for which interest would continue to be tax-exempt, if there is no employer contribution.

During Budget 2021, Sitharaman announced interest earned on the EPF contributions (only employee contribution) above ₹2.5 lakh will be taxable from 1 April. "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," Sitharaman said in her Budget 2021 speech.

The move is aimed at taxing high-value depositors in the Employees Provident Fund. At least 12% of an employee's basic salary and performance wages is compulsorily deducted as provident fund, while the employer contributes another 12%. Anyone who earns more than ₹20.83 lakh a year will attract his or her interest on EPF contribution being taxed.

"As paying tax free interest on provident fund becomes more and more unsustainable, the government wants to curb high income earners from self contributing more to their PF accounts," said Archit Gupta, founder and chief executive officer, ClearTax.

"If employees’ contribution to provident fund on or after 1 April 2021 exceeds ₹2.5 lakh in any year, interest earned on contribution over ₹2.5 lakh shall be taxable. It may be noted that the new provision only takes into account employees’ contribution and not the total contribution to the fund during any year. This will have a limited impact specifically on the high-income salaried individuals," said Gaurav Saraf, partner, VPTP & Co.

The salaried employees who use Voluntary Provident Fund 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 the high income bracket," Gupta added.