Provident fund interest taxability limit increased to Rs 5 lakh

The Finance Minister announced modification of the threshold limit for taxability of interest on the provident fund to Rs 5 lakh against Rs 2.5 lakh notified in the Budget 2021 on a conditional basis. 

Budget 2021 came with an amendment to the EEE scheme of the provident fund contribution. To bring the high-income earners who park bulk amounts in the Provident fund accounts, the income tax department capped the tax-free interest on the PF contribution in EPF and VPF to a maximum of Rs 2.5 lakh per annum.

In a recent announcement made by the Finance Minister, the interest exemption limit of provident fund contribution is now increased to Rs 5 lakh from Rs 2.5 lakh. This increase in the exemption limit will be allowed only on one condition that the contribution does not include the employer’s contribution beyond the statutory limit of 12 per cent of the basic pay.

In most cases, an employer deducts PF contribution from the employee’s salary and adds an equivalent amount to the employee’s provident fund corpus subject to the basic pay of Rs 15,000 per month. In such cases, the limit of interest exemption remains unchanged to Rs 2.5 lakh. For contributions that an employee solely makes to his account, the exemption ceiling limit is raised to Rs 5 lakh. This amendment will become applicable from April 1, 2021.

The increase in exemption limit to Rs 5 lakh will benefit mainly the government employees, as they contribute to the statutory and central provident fund. For the private sector, where both the employee and employer contribute jointly, the ceiling limit will remain Rs.2.5 lakh.

Nirmala Sitharaman added that the ceiling limit would not impact the small and medium taxpayer, and they will continue to earn tax-free interest on their contributions. More than 90 per cent of the individuals will fall within the limit of Rs 2.5 lakh.

In the previous 2020 Budget, the finance minister had also applied for a cap limit for tax exemption on employers contribution to PF, NPS and superannuation funds at an aggregate of Rs 7.5 lakh per annum.

For any clarifications/feedback on the topic, please contact the writer at  jyoti.arora@cleartax.in

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