Provident Fund (PF):
Union Budget 2021-22 proposed to tax the interest income on Provident Fund (PF) contributions by employees exceeding Rs. 2.5 lakh a year.
The Ministry of Finance expressed concerns over investments as much as Rs. 1 crore each month into PF and suggested it was unfair that they get tax concessions as well as an assured return.
- The Employees’ Provident Fund (EPF) Scheme is managed under the aegis of the Employees’ Provident Fund Organisation (EPFO).
- EPFO is a government organization that manages provident fund and pension accounts for the workforce engaged in the organized sector in India.
About the Employees’ Provident Fund (EPF) Scheme:
The Employee Provident Fund is open for employees of both the Public and Private Sectors. Additionally, any organization that employs at least 20 individuals is mandatorily liable to extend the benefits of EPF to its employees. Both employer and employee contribute 12% of an employee’s monthly salary (basic wages plus dearness allowance) to the Employees’ Provident Fund (EPF) scheme. Of the employer’s share of 12%, 8.33% is diverted towards the Employees Pension Scheme (EPS).
- EPF scheme is mandatory for employees who draw a basic wage of Rs. 15,000 per month.
- The EPF interest rate is declared every year by the EPFO.
- EPFO implements the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.
- The EPF Act, 1952 provides for the institution of provident funds for employees in factories and other establishments.
- This savings scheme offers tax exemption under Section 80C of the Income Tax Act.
Proposed Tax on Income:
- The annual contribution to EPF and Gratuity – and also voluntary contributions to EPF – will be added.
- If the aggregate contribution exceeds Rs 2.5 lakh, the interest income on that will be taxed at the marginal tax rate in which the income of the individual falls.
- Importantly, only the contribution linked to the employees’ component will be calculated for taxation purposes.
- The employer’s contribution towards the EPF will not be considered for the calculation.
- The interest income on the additional contribution of a year will get taxed every year.
- This means that if an individual’s annual contribution to PF in FY22 is Rs. 10 lakh, the interest income of Rs 7.5 lakh will get taxed not only for FY22 but also for all subsequent years.
- The average normal EPF contributor would not be affected by this new proposal.