The Union Budget for financial year 2021-22 was announced on 1st February 2021. So read along to find out the updates relating to tax on PF as announced in the budget 2021.
Rationalization of tax-free income on PF
Budget 2021, Annexure B, point 15 states that “in order to rationalize 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. This restriction shall be applicable only for the contribution made on or after 1st April 2021.”
Tax on PF interest
This new law states that if any employee contributes over Rs 2.5 lakhs towards his provident funds (applicable on both EPF and GPF) in any financial year, then he is liable to pay tax on the interest earned on contribution exceeding Rs 2.5 lakh.
This was done primarily because employees who earn high salaries and contribute large sum of it towards their PF get tax benefit as well as almost 8% assured interest return. According to the Finance Minister, this amount sometimes tallies to even a few crores each month. Hence, this step was taken.
|PF Wage (Annual)||₹ 6,00,000||₹ 6,00,000||₹ 24,00,000|
|PF Employee Share||₹ 72,000||₹ 3,00,000||₹ 2,88,000|
|Tax Free Limit (for interest)||₹ 72,000||₹ 2,50,000||₹ 2,50,000|
|Taxable Limit (for interest)||₹ 0||₹ 50,000||₹ 38,000|
|Tax Free Interest (8.5%) (Approx)||₹ 6,120||₹ 21,250||₹ 21,250|
|Taxable Interest (8.5%) (Approx)||₹ 0||₹ 4,250||₹ 3,230|
Employee Number – A
The employee A has an annual wage of Rs 6 lakh on which he contributes 12% PF which is Rs 72,000 annually. To make calculations simple, we calculate 8.5% PF interest rate on complete Rs 72,000. Which is equal to Rs 6,120. Since this interest amount of Rs 6,120 is less than Rs 2.5 lakh, Employee A does not have to give any tax on the interest earned.
Employee Number – B
The next employee B with annual wage of Rs 6 lakh, contributes 50% of his salary to PF. This is voluntarily acceptable on the employee’s behalf. The employer is not mandated to match the employee’s extra contribution. Thus, employee B contributes annually Rs 3 lakh towards PF. Uptill now all the interest earned on it would be tax-free. But with the enforcement of the new law, the interest earned above Rs 2.5 lakh will be taxable. Hence, interest earned on PF contribution of Rs 2.5 lakh, which comes to Rs 21,250 at 8.5% interest rate, is tax-free. But interest earned on the extra Rs 50,000 which comes to Rs 4,250 if taken at 8.5% interest rate, will be taxable.
Employee Number – C
The last employee C with annual wage of Rs 24 lakh, contributes 12% of his salary to PF. Thus, employee B contributes annually Rs 2,88,000 towards PF. Uptill now all the interest earned on it would be tax-free. But with the enforcement of the new law, the interest earned above Rs 2.5 lakh will be taxable. Hence, interest earned on PF contribution of Rs 2.5 lakh, which comes to Rs 21,250 at 8.5% interest rate, is tax-free. But interest earned on the extra Rs 38,000 which comes to Rs 3,230 if taken at 8.5% interest rate, will be taxable.
Impact on salaried employees
The Finance Minister also mentioned in her speech that the move is aimed at taxing high-value depositors in the Employees Provident Fund. This will have a limited impact specifically on the high-income salaried individuals. Thus, only 1% of PF contributors will be impacted approximately.
Though by general calculations, we can say that any employee who earns basic wage of over Rs 20.83 lakh per year will definitely attract his or her interest on EPF contribution being taxed. Other employees earning lower that this, but contribution at higher rate to PF, will attract the interest. Else they will not.
How to check for tax on PF?
To check whether you will be charged tax on PF, visit the PF employee member portal. Next, go to the PF passbook tab which is available in a new format. In the new PF passbook, look at the column for Deposit of Employee Share. The sum of all the values under a financial year if exceeding Rs 2.5 lakh will be taxable.
Important points to note
- The actual PF contribution amount is not calculated by summing up all values for a financial year. So, it is still to be seen how the government calculates it. Learn actual PF calculation process in 5 Most Important PF Interest Rate Calculation Rules.
- Exact mechanism of how the tax will be charged is still to be worked out. Whether it will be added in income from other sources or will be deducted as TDS by EPFO directly. This is not to be confused with the 80C limit. You can claim that deduction upto 1.5 lakh only each year, in which PF is included.
- If employers henceforth pay EPF contribution after the deadline of the 15th of any month, then they will not be able to get business deduction for it. It will be taxable.
Watch full video on tax on PF below.
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