Come April, and the interest on employees’ contributions to Provident Fund (PF) beyond Rs 2.5 lakh will be taxed. While those above the age of 75 years will not need to file income tax returns as long as they receive a pension and income from interest only, when it comes to the interest earned on an accrual basis for employees’ contribution to PF — statutory or voluntary contribution — beyond Rs 2.5 lakh, it will attract a tax.
This is the Government’s way of restricting tax exemption for high-income employees. The restriction will apply to contributions made on or after April 1, 2021.
As per the words of the Finance Minister, “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 Rs 2.5 lakh. This restriction shall be applicable only for the contribution made on or after 01.04.2021.”
Experts feel that PF may no longer be the most popular mode of investment for tax payers. Last year’s budget saw the Government setting the limit of Rs 7.5 lakh on tax-free yearly contributions to PF, NPS and other superannuation or retirement funds. Only contributions and deposits that exceeded the Rs 7.5 lakh limit were taxable. Now, employees who contribute more than Rs 20,833 towards provident fund, in a month, will have to pay tax.
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