Tax to be levied on Interest if PF deposits exceed 2.5 lakh
A tax saving work around has ended. It has been used by employees receiving high salary. The General Budget 2021 provides for a tax exemption limit for interest on Employees Provident Fund (EPF) and Voluntary Provident Fund (VPF). This means that the interest on provident fund contributions above Rs 2.5 lakh a year will now be taxed at normal rates. This will only apply to the contribution of the employees, not the contribution of the employer (company).
High-income salary employees to be effected
Under the existing provisions, the interest of Employees Provident Fund, Voluntary Provident Fund and Exempted Provident Fund Trusts is exempt from tax, no matter how high the PF contribution is. This new provision of the budget will have a direct impact on people with high-income salary, who use voluntary provident funds for tax-free interest. Under the EPF Act, employees and employee contribution (contribution of the company) is fixed at 12% of salary. However, employees can voluntarily contribute more than this amount to the Voluntary Provident Fund (VPF). VPF has no upper limit for contribution.
Benefit of full interest rebate without any limit
Prakash Hegde, a chartered accountant from Bengaluru, says, “Some employees contribute high sums to provident funds (Recognized Provident Fund and Central Government Funds like EPF) and take advantage of the discount on full interest without any limit.” In the budget proposal, the finance minister has proposed a rebate on interest on PF contribution up to Rs 2.5 lakhs in a year. The new limit will apply to contributions made on or after 1 April 2021. This move will have an impact on less than 1 percent of employees of Employees Provident Fund.
