Govt raises PF's tax-free limit to ₹5 lakh. Here's who will benefit the most

The government has raised the tax exemption limit on interest earned on PF contribution by employees to ₹5 lakh per annum in specified cases, as compared to ₹2.5 lakh proposed earlier in the Union Budget.

This was announced by the Finance Minister Nirmala Sitharaman on Tuesday in the Lok Sabha during the discussions in the Lower House on the Finance Bill 2021. This means that an employee who contributes ₹5 lakh annually towards Employees’ Provident Fund (EPF) will not be taxed on the interest income from it.

However, the FM clarified that this exemption is only applicable to those contributions that are made by the employee and does not include the employer’s contribution beyond the statutory limit of up to 12 per cent of basic pay.

“So, most often, it is employee contribution and employer’s contribution, but there are contributions which are only employee and no employer contribution is made, in such cases that amount is raised to ₹5 lakh,” the finance minister said, India Today reported.

Also read: Provident fund interest rate for 2020-21 remains unchanged at 8.5%

This decision to cap the tax-free interest earned on PF contribution by employees and employers together to a maximum amount of ₹2.5 lakh in a year was declared in the Budget 2021-22. In February, the government had defended this move stating that they had found instances where some employees were getting tax benefits by parking large amounts of money in this PF account. The PF account was meant to be a common man’s retirement fund.

Therefore, with the objective to prevent HNIs from escaping the tax net by making large contributions in PF, the government had proposed to impose a threshold limit at ₹2.5 lakh contribution for tax exemption. Now, in short, this has been scaled up to ₹5 lakh.

This rule comes into effect from April 1.

Who will benefit?

Middle- and high-income earners in the country will benefit from this new rule. Employees who contribute ₹5 lakh annually or ₹41,667 monthly into the PF account, their interest income from this deposit will not be taxed. If the PF contribution made by an employee goes up above ₹5 lakh annually, the interest accruing from the additional income will be taxed.

Who will be impacted?

For example, anyone who earns more than ₹20.83 lakh a year will attract tax on the interest from their EPF contribution. Individuals with monthly basic salary of over ₹3,47,216 will now get impacted by the move as their annual EPF contributions (at the rate of 12 per cent of basic salary) would exceed ₹5 lakh, media reports said.

The salaried employees who use Voluntary Provident Fund to invest more than mandatory 12% of basic pay, will also be impacted.