The BuyT Desk
The Union Budget 2021 presented on 1st February made interest of employee provident fund (EPF) taxable for the contribution above Rs 2.5lakh. You should be worried if you are making a high contribution to EPF. The government said that this decision would impact a small category of high-income earners only. This tax is applicable only on the employee’s contribution and not on employer contribution.
What does the Finance Bill say?
Finance Minister Nirmala Sitharaman while presenting the budget said- “To rationalise 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 01.04.2021.”
From EEE to ETE
The EPF has been a 100% tax-free investment. It was not taxed at all the three levels- your deposit, earned interest and at the time of withdrawal. Traditionally it has been an exempt-exempt-exempt investment. Now it is exempt-tax-exempt but only for those who are depositing more than Rs 2.50 lakh. Along with EPF, the Voluntary Provident Fund became very popular to park surplus amounts and earn tax-free income. There is no cap on VPF contribution. In EPF there is a cap of 12 % on employees contribution, but in VPF there is no such limit. So high-income employees were parking their surplus fund to earn tax-free income.
Let’s consider this, an employee with a basic salary of Rs 1.75 lakh contributes 12% of his/her basic towards EPF it would be Rs 20,833 per month. This EPF contribution will add up to Rs 2.50 lakh annually. Apart from EPF if the employee also contributes around Rs 50,000 in a year to VPF, you will be liable to pay tax on the interest of Rs 50,000.
Based on your annual contribution to your EPF, your interest will be taxed. So an employee only with a huge salary will be contributing more than Rs 2.5 lakh in a year. Consider an employee whose basic is Rs 1 lakh a year. At the rate of 12% , the EPF contribution would be Rs 12,000 monthly and Rs 1.44 lakh annually. Even if he/she wants to contribute towards a VPF and contribute almost over a lakh,then only will the contribution cross the threshold of Rs2.50 lakh.
You have nothing much to worry about unless you are a high earner.
