Union Budget 2021 has proposed to levy income tax on interest received by an employee. It is calculated towards his/her contributions to the provident fund of above Rs 2.5 lakh once a year, starting from 1 April. FM Nirmala Sitharaman stated in her Budget 2021 speech that to accommodate tax exemption, it is suggested to limit tax exemption. It is done for the interest income earned on the employees’ contribution to several provident funds.
Presently, any payment from a provident fund set up below the Provident Funds Act, 1925, is exempted below section 10(11). Similarly, any interest accrued/received on the collected balance of such provident funds is exempt below section 10(12).
The implication of the amendment
Aarti Raote, Partner, Deloitte India, described: “One amendment that has influenced most highly paid workers is the taxation of interest accruals. It is performed on yearly employee contributions to the provident fund in the balance of INR 250,000 from April 1, 2021.
The PF is regarded as old age security by many. It is one of the favored investment avenues regarding the assured rate of return, final secured benefit, and zero taxation on withdrawal granted to the employee. It has been a contributing member of the fund for five years or more.
This is the reason why several employees try to contribute a greater amount towards PF.”
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“This bill would affect workers taking a PF salary in excess of INR 20 lakhs. And if we assume that this is at least 50% of the employee’s total compensation, then his total salary would be in between INR 40 lakhs or more.
Hence such employees would require to face the income tax cut on interest earnings going ahead. The PF scheme does take off the finish for the higher income group,” she stated.
Vinay Joy, Partner, Khaitan & Co says, “Technically the budget plan would apply to both the EPF and the PPF. Although this would affect independently to both and not in connection to an addition of the dues in both of them. A new proviso will be proposed in section 10 (11) and 10 (12) of the Income-tax Act,1961.
The exclusions given in those sections would apply in relation to amounts provided “in that fund”. This indicates that each of the funds would be treated individually. The purpose is not to aggregate the amounts prevailing in the PPF together with those gathered in the EPF. Then implement the threshold of 2.5 lakhs.
Hence, if the contribution by an individual in a year to the PPF is 1.5 lakhs while that in the EPF is 3 lakhs. Then it would just be the interest on the 50,000. It would be as taxable income for the employee and not the interest on 2 lakhs”
Will it cover contribution to the PPF account?
After reading the Budget document, it seems that tax will apply to the interest gained on contributions made to certain Pf’s. Those PF’s are Employees’ Provident Fund (EPF), Voluntary Provident Fund (VPF), and Public Provident Fund (PpF).
However, tax experts have established that there are separate boundaries for EPF/VPF and PPF. It suggests that the contributions to PPF and EPF/VPF will not be aggregated for the objective of calculating the Rs 2.5 lakh limit.
Kush Vatsaraj, Associate, TP Ostwal & Associates LLP stated: “The suggested amendment will not influence anyone doing contributions to PPF accounts. There is already a yearly cap of INR 1.5 lakh.
Salaried persons who offer contributions to their PF scheme in surplus of INR 1.5 lakhs per annum will also not be changed. They can only claim a deduction of up to INR 1.5 lakh below section 80C, and the excess contribution is already taxable as salary income.”
This amendment tries to reduce such disproportionate advantage. It tries to move forward even the interest income collected on the amount contributed in excess of Rs 2.5 lakh will be taxable.
To reiterate, this amendment implements only to interest income on the amount of contribution. It is implemented in surplus of Rs 2.5 lakh by salaried persons as section of their PF scheme and does not alter PF contributions,” he explained.