Starting from 1 April, the curiosity on worker contributions to provident fund of over ₹2.5 lakh each year shall be taxed, finance minister Nirmala Sitharaman introduced within the Union Budget 2021. Up to ₹2.5 lakh has been saved because the deposit restrict for which curiosity is tax exempt, finance minister stated. In Finance Bill 2021, the federal government has launched an modification to the rule. The finance ministry elevated the deposit threshold restrict to ₹5 lakh each year in provident fund for which curiosity would proceed to be tax-exempt, if there is no such thing as a employer contribution.
At least 12% of an worker’s primary wage and efficiency wages is compulsorily deducted as provident fund, whereas the employer contributes one other 12%.
Key issues that you must know to about new rule on taxation of curiosity on PF
1) “In order to rationalise tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of ₹2.5 lakh,” Sitharaman stated throughout Budget 2021.
2) The central authorities later elevated the restrict on taxation of curiosity to ₹5 lakh, in circumstances the place the employer just isn’t making any contribution to the fund.
“The amendment increasing the tax free interest on PF contribution of upto Rs. 5 lakh would provide some respite to the large tax payers. However, this has come with a rider wherein the increased limit is applicable only in cases where the employee has contributed to a fund in which there is no employer contribution. In most of the cases, employees voluntarily increase their contribution to the same fund in which employer contributes their share,” clarified Divakar Vijayasarathy, founder and managing accomplice, DVS Advisors LLP.
3) This transfer will have an effect on the high-income earners and High Net-worth Individuals (HNIs). Anyone who earns greater than ₹20.83 lakh a 12 months will appeal to his or her curiosity on EPF contribution being taxed.
“The government has justified this move by stating that around 93% of the contributors gets covered under the ₹2.5 lacs limit itself and it is only the large tax payers who are outside this limit,” stated Vijayasarathy.
4) “It may be noted that the new provision only takes into account employees’ contribution and not the total contribution to the fund during any year,” stated Gaurav Saraf, accomplice, VPTP & Co.
5) The salaried workers who use Voluntary Provident Fund to take a position greater than necessary 12% of primary pay, may even be impacted. “A large tax free interest accrual which is not taxed on withdrawal either, is now being rationalised and will mostly impact the high income bracket,” stated Archit Gupta, founder and chief government officer, ClearTax.
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