New PF tax rules from April 1

The Finance Minister Nirmala Sitharaman announced in Budget 2021 that the government will start taxing interest on employee contributions of over Rs 2.5 lakh annually to the provident fund, beginning on 1 April 2021. Annual deposit up to Rs 2.5 lakh is allowed to be exempt from capital gains tax.

This is compulsory and compulsory contributions are deductible from the employee’s wages, while the employer can also contribute another 12 percent. This is so the government may control wealthier people from over contribution to their PF accounts.

TV Somanathan (Expenditure Secretary) had said that the number of people who actually contribute more than Rs 2.5 lakh is limited to only less than 1 percent of the total number of contributors in the EPF. In order to rationalize the tax exemption for the income earned by high-income employees, the finance minister announced an amendment to restrict the tax exemption for interest income earned on the employees’ contribution to various provident funds to the annual contribution of Rs 2.5 lakh.

This will mainly affect the high-income earners and High Net-worth Individuals (HNIs). Under existing tax law, the interest accrued from an employee’s provident fund (EPF) is exempt from taxes. The new rules will have a significant impact on high-income bracket and those with their own retirement fund and make large provident fund contributions.

That total will be calculated when all deductions are taken into account. The minister said that income from the capital will be tax exempted and will get a reasonable return.

Even salaried employees will be impacted by this. An escape route will be rationalized so that banks will no longer levy tax on interest earned out of your interest-earning funds. The calculation of the taxation details have not yet been shared by the government.

Besides, there are a large number of individuals who have been waiting for their EPF funds for a very long time. It happened because of the delay of the employee’s KYC. Employers of EPF are requested to seek assistance from the EPFO.