Union Finance Minister Nirmala Sitharaman has proposed taxability of interest on various provident funds where income is exempt, in her Budget speech presented in Parliament on Monday (February 1). 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.
In the 2020 Budget, the finance minister had capped the tax exemption on employers contribution to PF, NPS and superannuation funds at an aggregate of Rs 7.5 lakh per annum.
Finance Minister Nirmala Sitharaman said the Employee Provident Fund (EPF) is aimed at the welfare of workers and any person earning less than Rs 2 lakh per month will not be affected by the Budget proposal.
Expenditure Secretary T V Somanathan said the number of people who actually contribute more than Rs 2.5 lakh is less than 1 per cent of the total number of contributors in the EPF. Employees' Provident Fund Organisation (EPFO) has over six crore subscribers.
"In order 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," Sitharaman said in her Budget 2021-22 speech. This would come into effect from April 1.
"We are not reducing any workers right. But at the same time, getting tax exemption and 8 per cent rate of interest for somebody who puts Rs 1 crore into the account, we thought it may not be correct. And therefore we have put the ceiling," she said.
It is only the big-ticket money which comes into the fund and gets tax benefit as well as assured about 8 per cent returns that would come under the tax ambit.
"You have huge amounts, some to the extent of Rs 1 crore, being put into this account each month. For somebody who puts Rs 1 crore each month into this fund, what would be his salary? So for him to get tax concession and 8 per cent return we thought is probably not comparable with an employee with Rs 2 lakh who puts that money, gets tax concession and gets 8 per cent return. That person would still be allowed to put in money, but of course with a ceiling of Rs 2.5 lakh," she said.
