New PF tax rules will kick in from April 1, 2021: Here's how it will impact you

Union Finance Minister Nirmala Sitharaman on February 1, announcing the Union Budget 2021 said that interest on employee contributions to PF over a certain amount has now been made taxable. The Budget for the fiscal year beginning April will now make interest on employee contributions to PF above Rs 2.5 lakhs per annum taxable effective April 1, 2021.

The restriction on tax interest earned on annual provident fund contribution of over Rs 2.5 lakh shall be applicable only for the contribution made on or after April 1, 2021.

At present there is no tax on interest earned on provident fund deposits. In the previous 2020 Budget, the finance minister had capped the tax exemption on employer’s contribution to PF, NPS and superannuation funds at an aggregate of Rs 7.5 lakh per annum.

The government decision is aimed at majorly impacting those employees in the high income bracket or employees who voluntary make large contribution in the EPF, other than the prescribed 12 percent mandatory provident fund contributions.

Every month atleast 12 percent of an employee's basic salary and performance wages is mandatorily deducted in the form of Provident Fund, while the another 12 percent share is borne by the employer.