Income Tax

No tax free returns on high PF contribution. Read to know more.

Chris Martenson is an economic researcher

The interest earned by the Provident Fund contributions above Rs 2.5 lakh a year will now be taxable. The provision, introduced in Budget 2021 will apply only to the employee’s contribution and not that of the employer. The restriction will be applicable for the contribution made on or after April 1, 2021. 

This is a continuation of the government’s move last year to set an aggregate limit of ₹7.5 lakh for employer contributions to the PF, National Pension System (NPS) and superannuation fund, any contribution beyond which was made taxable.

Those contributing more than Rs 2.5 lakh a year to the EPF will have to pay tax on the interest earned on the amount above that limit. For example, if an individual contributes Rs 3.5 lakh to the EPF in the financial year through March 2022, the interest earned on Rs 1 lakh will be taxed based on the employee’s income tax slab.

Who fall in this catagory ?

The limit of 2.5 lakh can be breached in two ways :

a) Assuming a contribution of 12% of basic salary, an employee earning more than 20.8 lakh a year in basic salary will breach the cap.

b) Also those who have chosen to voluntarily bolster their contributions to the EPF can also cross the limit.

“EPFO is for welfare of workers and workers will not be affected by this move. It is only for big ticket money which comes into EPFO which has tax benefit and also assured 8 per cent return,” Ms Sitharaman said while addressing the post-budget press conference.

“You find huge amounts, at times to the extent of ₹ 1 crore each month for somebody who puts ₹ 1 crore each month what would be his salary for him to get tax exemption and an assured return. We thought we are not reducing workers right but at the same time getting tax exemption and also getting 8 per cent rate of interest for somebody who puts ₹ 1 crore per month into the account we thought may be its not right and therefore we have put that ceiling,” Ms Sitharaman said.

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