New Provident Fund tax rules from April 1: Know how it will affect you

New Delhi: Union Finance Minister Nirmala Sitharaman in the Union Budget 2021 stated that the interest on the employee contributions of over Rs. 2.5 lakh per annum to the Provident Fund would be taxed from April 1. The annual contributions up to Rs. 2.5 lakh has been kept as the deposit limit on which tax exemption is allowed. 

Every month at least 12 per cent of an employee's basic salary and performance wages is mandatorily deducted in the form of Provident Fund. The employer adds 12 per cent from his share. In this fashion, the government wants to limit the high-salaried persons from self contributing more to their Provident Fund accounts. 

Under the existing tax provisions, interest received from the employees' provident fund (EPF) is exempt from the tax. It looks like this move will prominently affect the high-income earners and high-net worth Individuals (HNIs)

Union Finance Minister Nirmala Sitharaman said in the budget speech " In order to rationalise tax exemptions for the income earned by high-income employees, it is proposed to restrict tax exemption for the income interest earned on the employees' contribution to various provident funds to the annual contribution of Rs. 2.5 lakh." 

The Finance Minister added by saying " The big-ticket money which comes into the fund and gets tax benefits as well as assured 8 per cent returns that would come under the tax ambit." 

Apart from the high-income earners, the salaried employees who use the Voluntary Provident Fund (VPF) to invest money over the compulsory 12 per cent of the basic pay, will get impacted by it. A large tax-free interest accrual that is not taxed on withdrawal either is now being rationalised and will mostly impact those in the high-income bracket. 

The Ministry has not shared the taxation details and thus the method of calculation will be specified later.