In her budget 2021 announcements, the FM had proposed that the interest earned on an employee’s contribution above Rs 2.5 lakh in a year will become taxable in the hands of the employee. As of today, the entire PF contribution earns a tax-free return and the PF amount enjoys EEE status. But, from April 1, 2021, the taxation of PF contributions is to see a change. The interest earned on contributions above Rs 2.5 lakh per annum will be taxable as per one’s tax slab similar to how interest income from bank fixed deposit is taxed.
“Now, the Finance Bill has been amended to direct that if any person makes a contribution to a fund in which there is no employer contribution, interest income accrued on account of employee’s contribution in excess of Rs 5 Lakh shall be taxed. The amendment shall impact only the government-sector employees, who contribute to the Statutory Provident Fund/ General Provident Fund. Consequently, while private-sector employees earning interest on Provident Fund on annual contribution exceeding Rs 2.5 lakhs would be required to pay tax on interest accruing on such excess contribution, for the government sector employees, the monetary ceiling shall be Rs 5 lakhs,” says Neha Malhotra, Director, Nangia Andersen LLP.
The prevailing provisions of the Income Tax Act grant an exemption in respect of any payment from specified provident funds. Additionally, accumulated balances due and payable to an employee by specified provident funds are also exempt subject to certain conditions. As per Budget 2021, it was proposed to tax the interest income accrued on account of the employee’s contribution in excess of Rs 2.5 lakhs in any previous year.