PF Taxation: Now you will not be able to create a big tax free fund through Provident Fund (PF). In fact, Finance Minister Nirmala Sitharaman in his budget speech proposed that the tax exemption should be limited to Rs 2.5 lakhs per annum contribution in case of interest income on employee contribution in various PFs. 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 the interest income from contribution up to Rs 2.5 lakh per annum in PF will be tax free. Interest income on contribution beyond this limit will be taxed. This will directly affect the employees, whose income is high and they get huge tax free interest income through Voluntary Provident Fund.
How will the new rule work?
Currently, EPF or VPF provides tax free returns on the entire PF contribution and EEE status on the PF amount. If your monthly basic salary is more than Rs 1.75 lakh (only basic salary, not total monthly income), then your monthly contribution will be more than Rs 20,835, which is Rs 2.5 lakh in a year, then earn on the increased amount thereafter. Interest income will be taxed.
For example, if a person’s basic salary is 1 lakh rupees, then the monthly contribution will be 12 thousand rupees, which is about 1.44 lakh rupees in a year. The employee contributes an additional 12 per cent to the VPF, bringing the total contribution to Rs 2.88 lakh in a year. In such a case, the interest earned on 38 thousand rupees (amount after 2.5 lakh rupees) will now be taxed.
Take care of tax while investing
The new PM rule will not affect the employee whose monthly contribution is less than Rs 20,833. However, if your basic salary is more than Rs 1.75 lakh, then interest income will be taxed. The only way to avoid this is if your employer gives the option to divert contribution to NPS.
Therefore, investors should take care while saving more than 2.5 lakh rupees per annum in VPF. In addition to returns, income tax plays an important role in fund creation over the long term. All investments do not provide tax free income and income tax should be seen based on the tax rate of the person on the income earned. Investors should look at the returns after tax before choosing any investment option.