In the 2021-22 Budget, it was announced that the interest earned on the provident fund contribution by employees and employers will be tax free to a limit of Rs 2.5 lakh. However, now the Centre has increased the cap to a maximum of Rs 5 lakh per year. However, the condition is that, with effect from April 1, the Centre plans to raise the limit to Rs 5 lakhs only in cases where the employer has not contributed to the fund.
That means, this hike in threshold limit will not be of any advantage to workers in the private sector, given that, as per the Employees’ Provident Fund and Miscellaneous Act, 1952, it is compulsory for employers to make matching contributions. Presently both employees and employers have to contribute 12 per cent of basic salary to the PF account. Employees in private sector cannot contribute more than the limit of Rs 2.5 lakh in a year, to enjoy tax exemption on interest.
On the other hand, for government employees, the maximum limit of contribution will go up to Rs 5 lakh, because they have a General Provident Fund wherein the employer, that is, the Government, does not make any contribution
The Rs 2.5 lakh limit covers 92-93 per cent PF subscribers, which entitles them to assured interest, which is tax free under this scheme.
These limits take care that small and medium taxpayers are not adversely affected. The Employees’ Provident Fund Organisation (EPFO) has over six crore subscribers.