Finance Minister Nirmala Sitharaman, when presenting the Budget 2021, has proposed taxability of interest on a variety of provident funds exactly where revenue is exempt.
Currently, Clause (11) of section 10 of the Act supplies for exemption with respect to any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 1925) applies or from any other provident fund set up by the Central Government.
It suggests, as of now, interest earned on EPF is totally exempted from tax in the hands of the employee. The government says that situations have come to the notice exactly where some staff are contributing large amounts to these funds and complete interest accrued/received on such contributions is exempt from tax below clause (11) and clause (12) of section 10 of the Act. This is accurate primarily in case of staff who contribute towards voluntary provident fund.
Accordingly, the FM says that it is proposed to insert a proviso to clause(11) and clause (12) of section 10 of the Act, offering that the provisions of these clauses shall not apply to the interest revenue accrued throughout the preceding year in the account of the individual to the extent it relates to the quantity or the aggregate of amounts of contribution produced by the individual exceeding Rs 2.5 lakh in a preceding year in that fund, on or immediately after 1st April, 2021.
“An interesting change not covered in the Speech relates to taxation of interest earned by employees on their Provident Fund. Interest earned on annual PF contribution exceeding 2.5 lacs from April 2021 will now be taxable. In the 2020 Budget, the FM had capped the tax exemption on employers contribution to PF, NPS and Superannuation fund exceeding an aggregate of 7.5 lakh per annum,” Alok Agrawal, Partner, Deloitte India
Currently, the interest price of EPF is 8.5 per cent per annum. The government had lowered interest price on Employee Provident Fund to 8.50 per cent for 2019-20 from 8.65 per cent in 2018-19. The contribution towards EPF is 12 per cent of the fundamental salary. However, guidelines let one to raise the contribution up to one hundred per cent of the fundamental salary. Any such extra contribution is identified as the Voluntary Provident Fund and also qualifies for tax advantage below section 80C.
“While last year’s change on taxation of Employer contributions would impact higher salalried employees, the change proposed in today’s Budget with respect to interest earned on employee’s contribution will have a much wider impact,” adds Agrawal. This suggests, going forward, the interest earned on your PF balance if the contribution exceeds Rs 2.5 lakh in a year will be taxable.