The Budget has proposed that the interest earned on employees’ annual contribution to provident fund more than `2.5 lakh will be taxable. It will be applicable only for the contribution created on or soon after April 1, 2021.
The government has underlined that some personnel are contributing large amounts to provident funds as the complete interest received on contributions is exempt from tax below clause (11) and clause (12) of Section 10 of the Income Tax Act. “This exemption without any threshold benefits only those who can contribute a large amount to these funds as their share,” the Budget documents say.
The Budget has proposed to insert proviso to clause(11) and clause (12), supplying that the provisions of these clauses shall not apply to the interest revenue accrued for the duration of the prior year in the account of the individual to the extent it relates to the quantity or the aggregate of amounts of contribution created by the individual exceeding `2.5 lakh in that fund, on or soon after April 1, 2021.
Amarpal S. Chadha, tax companion and India Mobility leader, EY, says realising there is a certain section of taxpayers who avail tax positive aspects in type of exemption on interest accrued from contributions created to recognised provident fund and public provident fund, the government has proposed to tax interest accrued on contributions exceeding `2.5 lakh per annum. “This may have wider implication as a large population of taxpayers would have planned this as an investment for their retirement. Given these changes, taxpayers would be required to rework their investments plans, in order to continue building their retirement corpus with minimum tax impact.”
Last year, the government had supplied an aggregate monetary cap of `7.5 lakh on tax-no cost employers’ contributions to recognized provident fund, authorized pension scheme or authorized superannuation fund and corresponding annual accretion (becoming interest or dividend or any other related quantity) in respect of such employers’ contributions to these funds. The objective of placing this monetary cap was to restrict tax advantage of such contributions to personnel in higher salary revenue levels, who could set aside a higher quantity from their salary to such tax-no cost funds.
Says Rakesh Nangia, chairman, Nangia Andersen India, “With proposed amendment, employees earning interest on Provident Fund on annual contribution exceeding `2.5 lakh would be required to pay tax on such excess contribution, as per rules to be notified later. While proposed amendment may not have any impact on employees earning moderate salary levels up to around `20 lakh (assuming contribution percentage of 12% per annum of basic salary), for other employees earning higher salary may need to pay tax on such income.”
Employee and employer contribution below EPF Act is set at 12% of simple and DA. However, an employee can improve voluntarily contribution up to one hundred% of simple salary and DA and get tax deduction of up to `1.5 lakh below Section 80C.