Union Budget 2021: A proposal of Budget 2021 is going to shock high-income people. They will no longer be able to create a large tax-free fund through the Provident Fund (PF). In fact, Finance Minister Nirmala Sitharaman in his budget speech proposed that the tax exemption in respect of interest income on employee contribution to various PFs should be limited to Rs 2.5 lakh per annum. This new proposal will be applicable to PF contributions to be held on or after 1 April 2021.
After the implementation of this proposal, only interest income from contribution up to Rs 2.5 lakh per annum in PF will be tax-free. Interest income on contribution over this limit will be taxed. This will directly affect the employees, whose income is high and they get huge tax free interest income through the Voluntary Provident Fund.
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A tax deduction of up to Rs 1.5 lakh can be claimed under Section 80C of the Income Tax Act on the contribution of an employee in PF. Also, the interest and money withdrawn on it is also tax free. But there is a condition attached to it. That is that withdrawal from EPF will be tax free only when the employee has made this withdrawal after working for 5 consecutive years. If the employee withdraws EPF amount before the completion of 5 years of job, then it will have to pay tax.
Interest income from contribution to PF is tax-free under Clause (11) and Clause (12) of Section 10 of the Income Tax Act. The Finance Minister says that a clause will be added to these clauses so that only the interest income from employee contributions up to Rs 2.5 lakh per annum in various PFs will be tax-free.
