In what comes as good news for those investing in Provident Fund (PF), the government has increased the exemption limit on interest on PF to Rs 5 lakh. Earlier, the limit was Rs 2.5 lakh.
However, this is only for employees where no contribution is made on behalf of the employer. This new rule regarding PF will be applicable from the new financial year i.e. April 1, 2021.
During the Budget 2021 presentation, Finance Minister Nirmala Sitharaman had announced that the interest on the investment of up to Rs 2.5 lakh per annum in PF will be tax-free, but tax will be imposed on the interest earned on the investment made above the Rs 2.5 lakh limit. It includes the contribution of both the employee and the company or employer. The government had taken this step to restrict those who earn interest by putting their surplus money in a PF account, whereas PF is seen as a retirement fund for the common people.
On Tuesday, the government passed the Finance Bill 2021 in the Lok Sabha. While answering the questions during the discussion on this bill, Finance Minister Nirmala Sitharaman said that the tax-free limit has now been increased from 2.5 lakhs per annum to 5 lakhs. The benefit of this exemption will be only to those PF account holders in which no contribution has been made by the employer.
She said that usually the employee and employer contribute to the Provident Fund, but in a case when only the employee contributes, then he/she will get the benefit of tax-free limit up to Rs 5 lakh. The Finance Minister assured that 92-93 percent of the people benefit from the free limit of Rs 2.5 lakh, who are subscribers and the interest they get will be absolutely tax-free. Therefore small and middle class taxpayers will not be affected by this change.
How to understand the new rules of PF
1. Suppose you do a job and you have an EPF account, then you and your company contribute 12 percent each in it. If both of them contribute Rs 2.5 lakh annually or less, then the interest paid on it will be absolutely tax-free. But you contributed more than Rs 2.5 lakh rupees annually, say Rs 3 lakh, you will have to pay tax on whatever interest you will get on the surplus contribution of Rs 50,000.
2. If you invest in Voluntary Provident Fund ie VPF and Public Provident Fund ie PPF, then you will not have to pay tax on the interest received on the total annual investment up to Rs 5 lakh. Employers have no contribution in VPF and PPF.