Personal Finance News

Impact of Tax on EPF interest: Union Budget 2021

The Union Budget 2021-22 has brought about notable changes to the taxation process besides other key amendments.

One such change being the taxation of interest income from Provident Fund Contributions exceeding Rs 2.5 lakh, like fixed deposit interest, as indicated by the Income Tax Department.

However, it is to be duly noted that the removal of tax exemption on annual contributions of Rs.2.5 lakh and above to provident fund accounts will not apply to the Public Provident Fund (PPF).

Tax experts have claimed that an individual with a current basic salary of below Rs.104,167 will not be impacted by this recent amendment.

In other words, if an assesse’s monthly contribution is more than Rs.20,833, he shall be liable to pay tax on the interest earned  on his contribution.

As a matter of fact, this will particularly affect those who have lower basic salary but higher total remuneration.

The highlights of this latest modification have been summarized below:

  • Interest is exempted from tax up to Rs.2.5 lakhs which has been kept as the deposit limit.
  • A compulsory deduction of 12% of an employee’s basic salary and performance wages as Provident Fund while the employer contributes another 12%.
  • The new provision only takes into account employees’ contribution and not the total contribution to the fund during any year.
  • Objective behind this move is taxing high value depositors in the Employees Provident Fund.
  • The big-ticket money which comes into the fund and gets tax benefit as well is assured about 8% returns which would come under the tax ambit.

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