The Employees’ Provident Fund (EPF) is a government-owned pension plan for salaried individuals. Under the EPF, which was earlier started as a social benefit scheme, both the employee and the employer make a contribution which is 12 per cent of basic pay and dearness allowance, every month.
In the Union Budget 2021, finance minister Nirmala Sitharaman announced a new tax limitation to the contributions made in the EPF. According to the new rule, any contribution to the Provident Fund (PF) over Rs 2.5 lakh in a year and interest accumulated on it will now draw tax implications. Only contribution of up to Rs 2.5 lakh in a year is exempted from tax.
The government is facing a revenue deficit and has a bigger role to play to uplift the overall economy. Archit Gupta, founder and chief executive officer of ClearTax, repeated the same, saying, “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.”
But, how will the new tax limitation affect us? The new rule is applicable only on the employee’s contribution and the employer’s contribution is not to be taken into account. The move is mainly for the high income earners making an annual income of Rs 20.83 lakh.
The interest earned on the EPF is currently exempt from any tax implications. The new rule implies that the salaried class either earning a good salary or making a higher contribution to the fund shall draw tax implication on the interest component. This is in case the employee contribution exceeds Rs 2.5 lakh in a year.
The rule, applicable from April 1, 2021, will also impact those making larger voluntary contributions to the Voluntary Provident Fund (VPF). “The big-ticket money which comes into the fund and gets tax benefit as well as assured 8 percent returns would come under the tax ambit,” the finance minister had said. The move puts its focus on large tax free interest accumulated which was not taxed on withdrawal either.