The existing tax provisions provide that the interest received/accrued from an employee’s provident fund (EPF) be exempt from taxes. The new PF rules will indisputably impact employees in the high-income bracket. In this article, we will discuss New PF Tax Rules from April 1 – Here’s How It Will Impact You
New PF Tax Rules from April 1
Finance Minister Nirmala Sitharaman, in the Union Budget 2021, announced that starting from April 1, the interest on employee contributions of more than Rs. 2.5 lakhs per annum to the EPF would be taxable. As per the new rules, interest on annual contributions up to Rs. 2.5 lakhs will be tax-exempt.
The Current Scenario
As per the existing rules, an employer mandatorily deducts a minimum of 12% of an employee’s basic salary or wages as PF. The employer contributes another 12% over and above this contribution. With the implementation of the new PF tax rules from April 1, the government plans to curb high-income earners’ tendency to contribute more towards their PF account to save taxes.
How the Decision Will Impact You
Besides high-income earners, salaried employees contributing more than 12% of their basic pay as voluntary PF also stand to lose. A large amount of tax-free interest, not taxed during withdrawal, will also be brought under the tax ambit that will significantly impact people in the high-income bracket. How the government plans to calculate taxes on these accruals would be specified later as the complete details have not yet been shared.
However, the good news is that only the employee contribution to the PF fund would come under the tax purview and not the total contribution. The finance minister added that the aim is to tax high-amounts flowing into the PF fund that gets both tax benefits and 8% assured returns.
Notification on New PF laws
Suppose you are an employee who had earned a basic salary of Rs. 1.75 lakhs per month during a year. The monthly PF amount you would have contributed towards your PF would have been Rs. 20,833@12%, or Rs. 2,49,996 a year. However, if you had earned a basic salary of more than Rs. 1.75 lakhs per month, the interest earned on PF contribution would be taxable unless your employer had provided you with an option to divert the contribution towards NPS.
Let’s say you are an employee who had made a voluntary contribution of 12% towards your PF over and above the mandatory 12% deducted by your employer. If your basic salary was Rs. 1,00,000, the total monthly contribution towards your PF would have been Rs. 2,88,000. In such a case, the interest earned by you on the additional contribution of Rs. 38,000 would be taxable under the new PF tax rules from April 1.
The move is an effort to rationalize tax exemption on the income earned by high-income employees. The move will adversely affect high-income earners and high net-worth individuals (HNIs) making significant voluntary contributions to their PF.
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