The government on Tuesday raised the limit for tax exemption on interest earned on employees’ provident fund (EPF) contribution to Rs 5 lakh per annum in specified cases, compared to Rs 2.5 lakh proposed in the Union Budget. However, it must be noted that this exemption is subject to the condition that the Rs 5 lakh contribution does not include the employer’s contribution.
This will be applicable for all contributions beginning April 1, 2021.
In view of this, let's understand it in detail: So, what it actually means?
In simple words, this means that an employee who contributes up to Rs 5 lakh annually i.e. Rs 41,667 monthly towards EPF on an annual basis will get tax-exempt interest income on it, subject to the condition that it has no employer's contribution.
Now, in this case, if the PF contribution exceeds Rs 5 lakh annually, then the interest income on the additional PF contribution — the remaining amount after deducting Rs 5 lakh — will be taxed.
According to experts, this Rs 5 lakh contribution just talks about one's own contributions.
Who will benefit?
According to Adhil Shetty, CEO, BankBazaar.com, the revised threshold will affect only a very small section of investors.
“The change will benefit only those who are working in companies with fewer than 20 employees or where the employee’s salary is above the threshold and the employer doesn't make any contribution to the EPF,” Shetty explains.
However, as Shetty adds, even in this case, there is no clarity on how the taxation would be implemented.
"We still don’t know whether the interest income above the tax-free level will be on an annual accrual basis or at the time of withdrawal. Also, there’s no clarity on who would be responsible for deducting tax at source (TDS). So, we are still waiting for the Gazette notification to come out so that these details become clear,” he opines.
As we know, in the EPF kitty, the employee mandatorily contributes 12 percent of the salary while an equal amount is contributed by the employers in companies with more than 20 employees. The same can be optionally enhanced by the employee and then it is called Voluntary Provident Fund (VPF).
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