- The finance ministry had proposed in its latest Budget Session that employee accounts with more than ₹2.5 lakh annual contribution will be taxable sooner.
- Employees’ Provident Fund Organisation (EPFO) has over six crore subscribers.
- The move is aimed to tax HNIs who benefit from tax-free interest income on their large contributions to PF accounts.
The government on August 31 announced that Employees Provident Fund (EPF) accounts with more than ₹2.5 lakh annual contribution will be taxed.
It was proposed by the government in Budget 2021 that interest on Employees’ Provident Fund (EPF) and Voluntary Provident Fund (VPF) contributions above ₹2.5 lakh in a financial year will be taxable.
Why did the government decide to impose tax on excess EPF contributions?
The government found out that employees were contributing huge amounts to the PF funds as it ensured 8% returns and tax exemptions at all stages.
EPF accounts are like a common man’s retirement fund as they earn average earnings. It is mandatory for employees earning up to ₹15,000 a month in firms with over 20 workers, with 12% of the basic pay and dearness allowance (DA) deducted as employees’ contribution and another 12% remitted by the employer.
However, government as well as private sector employees are allowed to make voluntary contributions over and above the statutory deductions.
So, to exclude high net worth individuals (HNIs) from the benefit of tax-free interest income on their large contributions, the government has set a threshold limit of ₹2.5 lakh for tax exemption. Those who have contributions below ₹2.5 lakh will not be charged.
How will the contribution be taxed?
The new rules say that for better calculation, two separate accounts shall be maintained from 2021-22 for taxable and non-taxable contributions made by a person.
For individuals in the higher tax bracket of 30%, the interest income on contributions above ₹2.5 lakh would get taxed at the same marginal tax rate.
For instance, if an individual contributes ₹3 lakh every year to the provident fund (including the voluntary PF contribution) then the interest on his contribution above ₹2.5 lakh, which is ₹ 50,000 will be taxed.
This only applies to contributions made from 1 April 2021.