Tax on Interest on EPF Contribution exceeding Rs 2.5 Lakh
“No retro taxation on interest earned for EPF/GPF contributions of over Rs 2.5 Lakh
Interest of more than Rs 2.5 Lakh earned annually from contribution to Employees Provident fund (EPF) or Government Provident Fund (GPF) will not be taxed retrospectively, Expenditure Secretary TV Somanathan clarified.
Announcement was made at
Business Line webinar on “Decoding the Budget 2021-22”
The webinar was powered by HDFC Bank with BSE as as assosciate sponsor.
EPF is the only saving instrument where one gets tax emption at the time of contribution, then on the accumulation and, finally, at the time of withdrawal. This is called EEE (Exempt-Exempt-Exempt) mechanism.
Presently, any payment received by an employee from his provident fund account is fully tax free. The payment received from the provident fund comprises of contribution made by the employer and the employee as well as the interest accrued on the contributions.
An employee is required to contribute 12% of his basic salary and dearness allowance towards employee provident fund account which is required to be matched by the employer by equal contribution. There is no such restriction on the employee contributing beyond 12% as voluntary contribution.
Since the interest on contribution made by an employee enjoys tax exemption without there being any upper limit, the government has proposed that interest accrued in respect of employee’s contribution in excess of Rs. 2.50 lakhs every year shall become taxable in the hands of the employee at normal rate. This will apply to the Employees Contribution and not that of the employer.
This will be effective on contributions made from April 1 2021, So the interest in respect of annual contribution of Rs. 2.50 lakhs only will come tax-free and any interest accrued on excess contribution shall become taxable in the hands of the employee year after year.
Additional Info – Exemption
- GPF & EPF flows into an account above Rs 2.5 Lakh will be directed to a separate sub-account.
- The primary account including your past balance as on March 31, 2021 will always remain tax free;
- Interest will also not have to be declared.
- PPF, EPF, VPF, Ulips are some of the Popular Tax Free Investment Option available to Investors.
However, the proposal may not face as big a backlash this time because it affects only the creamy layer of salaried employees. The Rs 2.5 lakh annual threshold means that a person contributing up to Rs 20,833 a month to PF (basic salary of up to Rs 1.73 lakh a month) will escape the tax. This means if your Monthly basic salary is above Rs 1.75 Lakh (just the basic salary and not your total monthly income), your monthly contribution will be above Rs 20835 which is Rs 2.5 lakh in a year, then the interest income earned on the exceeded amount is taxable.
For example, for someone with a Basic Salary of Rs 1 lakh, the monthly contribution is Rs 12,000 which is about Rs 1.44 lakh in a year. The employee contributes an additional 12 per cent into VPF taking the total contribution to Rs 2.88 lakh in the year. In such a case, the interest earned on Rs 38,000 (excess of Rs 2.50 lakh) will now get taxed.
The new PF contribution rules will not impact an employee whose monthly contribution is below Rs 20,833. However, if your Basic Salary is above Rs 1.75 lakh, there’s no escaping tax on interest earned.
In my opinion, since we do not have social security system in our country why should the government discourage anyone from contributing higher amount towards his retirement fund. The government should rethink on this proposal.
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