If you contribute more than ₹2.5 lakh yearly to provident fund, it will now be taxed — All you need to know

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If you contribute more than ₹2.5 lakh yearly to provident fund, it will now be taxed — All you need to know
Employees’ Provident Fund (EPF)Pixabay
  • The finance ministry had proposed in its latest Budget Session that employee accounts with more than ₹2.5 lakh annual contribution will be taxable sooner.
  • Employees' Provident Fund Organisation (EPFO) has over six crore subscribers.
  • The move is aimed to tax HNIs who benefit from tax-free interest income on their large contributions to PF accounts.
The government on August 31 announced that Employees Provident Fund (EPF) accounts with more than ₹2.5 lakh annual contribution will be taxed.

It was proposed by the government in Budget 2021 that interest on Employees’ Provident Fund (EPF) and Voluntary Provident Fund (VPF) contributions above ₹2.5 lakh in a financial year will be taxable.

Why did the government decide to impose tax on excess EPF contributions?



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The government found out that employees were contributing huge amounts to the PF funds as it ensured 8% returns and tax exemptions at all stages.

EPF accounts are like a common man’s retirement fund as they earn average earnings. It is mandatory for employees earning up to ₹15,000 a month in firms with over 20 workers, with 12% of the basic pay and dearness allowance (DA) deducted as employees’ contribution and another 12% remitted by the employer.

However, government as well as private sector employees are allowed to make voluntary contributions over and above the statutory deductions.

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So, to exclude high net worth individuals (HNIs) from the benefit of tax-free interest income on their large contributions, the government has set a threshold limit of ₹2.5 lakh for tax exemption. Those who have contributions below ₹2.5 lakh will not be charged.

How will the contribution be taxed?



The new rules say that for better calculation, two separate accounts shall be maintained from 2021-22 for taxable and non-taxable contributions made by a person.

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For individuals in the higher tax bracket of 30%, the interest income on contributions above ₹2.5 lakh would get taxed at the same marginal tax rate.

For instance, if an individual contributes ₹3 lakh every year to the provident fund (including the voluntary PF contribution) then the interest on his contribution above ₹2.5 lakh, which is ₹ 50,000 will be taxed.

This only applies to contributions made from 1 April 2021.

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