Budget 2021: Setback For High Income Earners, Interest On PF Contribution Above Rs 2.5 lakh Now Taxable

Budget 2021: This restriction shall be applicable only for the contribution made on or after April 4, 2021. Pointing out that employee and employer contribution under the EPF (Employees' Provident Fund) Act is set at 12 per cent of the salary, the Budget document said one can, however, voluntarily contribute more than this amount to VPF (Voluntary Provident Fund), adding withdrawal of EPF after five years of continuous service is exempt from tax.

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Budget 2021: Announcing proposals to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds for high-income employees, Finance Minister Nirmala Sitharaman in the Union Budget 2021-22 said the interest earned by the Provident Fund (PF) contributions above Rs 2.5 lakh a year will now be taxed at the normal rates.

The Budget document read in the Lok Sabha by Union Finance Minister Nirmala Sitharaman 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.”

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This restriction shall be applicable only for the contribution made on or after April 4, 2021.

Pointing out that employee and employer contribution under the EPF (Employees' Provident Fund) Act is set at 12 per cent of the salary, the Budget document said one can, however, voluntarily contribute more than this amount to VPF (Voluntary Provident Fund), adding withdrawal of EPF after five years of continuous service is exempt from tax.

Deloitte director Nitin Baijal on his part said the Union Budget announced by the Finance Minister had “flavours of the past budgets i.e. “provide relief to senior citizens and tax HNIs”. 

Ultra-rich individual investors who hold shares worth of over Rs 2 lakh in a company are classified as HNIs.

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Aarti Raote, Partner, Deloitte India, while reacting to the government proposal said this budget seeks to tax the interest accruing on employee contributions made in excess of Rs 2.5 lakh towards PF from April 1, 2021, adding “this is likely to jeopardise the most preferred investment avenue for many taxpayers.