The government raised the deposit threshold limit, for which interest would continue to be tax-exempt, to Rs 5 lakh per annum in provident fund (PF) account. This would be applicable to those cases where no contribution is made by employers to the retirement fund.
Note that in her Budget 2021 speech, Finance Minister Nirmala Sitharaman had proposed that interest on employee contributions to provident fund over Rs 2.5 lakh per annum would be taxed from April 1, 2021. FM in her speech had said, "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."
The move is aimed at taxing high-value depositors in the Employees Provident Fund. At least 12% of an employee's basic salary and performance wages is compulsorily deducted as provident fund, while the employer contributes another 12%. Anyone who earns more than Rs 20.83 lakh a year will attract his or her interest on EPF contribution being taxed.
Replying to the debate on the Finance Bill 2021 in the Lok Sabha on Tuesday, Sitharaman increased the deposit threshold limit to Rs 5 lakh per annum in provident fund for which interest would continue to be tax-exempt, if there is no employer contribution.
If employees’ contribution to PF on or after 1 April 2021 exceeds Rs 5 lakh in any year, interest earned on contribution over Rs 5 lakh shall be taxable. This would be applicable to those cases where no contribution is made by employers towards PF. This will have a limited impact specifically on the high-income salaried individuals. The salaried employees who use Voluntary Provident Fund to invest more than the mandatory 12% of basic pay, will also be impacted by this move.
Note that the Finance Bill, which gives effect to tax proposals for 2021-22, was approved by voice vote. The bill was passed after acceptance of 127 amendments to the proposed legislation. FM in her reply emphasised that the tax on interest on provident fund contribution affects only 1 per cent of the contributors, and the remaining are not impacted as their contribution is less than Rs 2.5 lakh per annum.
