While the Budget 2021 proposed to tax any interest to the extent it relates to amount of Provident Fund contribution exceeding Rs 2,50,000 made by an employee, the Finance Bill has seen a key tweak on this front. The Finance Bill 2021 passed by the Lok Sabha has amended the provision. Now, where the employer is not making any contributions to the Provident Fund, the threshold limit of Rs 2,50,000 would be enhanced to Rs 5,00,000. Let us find out how this may impact you and importantly when.
The above amendment is likely to have a positive impact from taxation perspective for the employees who are sole contributors to the Provident Fund.
It is pertinent to note that not all the employers/ organization are required to contribute to the Provident Fund but only such employers who are mandatorily required to register under the Employees’ Provident Fund and Miscellaneous Act, 1952. As per the said EPF Act, employers employing 20 or more employees are mandatorily required to register and contribute 12% of the Basic wages + Dearness Allowance + Retaining allowance to the PF account and an equivalent amount would be contributed by the employee.
“The provisions as initially proposed by the Finance Bill 2021 introduced on 1 February 2021 were formulated taking into consideration that both the employers and employees contribute to the Provident Fund. However, there may be circumstances whereby the employee is the sole contributor to the PF account….in such case, the earlier proposed provisions would have placed the employee at a disadvantageous position with respect to the threshold limit vis-Ã -vis an employee in respect of whom the employer is also contributing to such fund,” says Dr. Suresh Surana founder, RSM India.
In other words, the earlier proposed provisions specified the same threshold of Rs 2,50,000 per annum for cases where employees are solely contribution to the PF as well as where the employers and employees are both contributing to such funds.
“The amendment to the Finance Bill 2021 would have the effect of enhancing the threshold limit to Rs 5,00,000 in case where the employee is the sole contributor to the Provident Fund. Thus, an employee would not be subject to tax on the interest derived from a PF to the extent it relates to amount of Provident Fund contribution upto Rs 5,00,000. Only, where the contribution exceeds Rs 5,00,000, tax would be levied on the interest amount exceeding such threshold,” added the RSM India expert.
With effect from 1 April 2021 (ie AY 2022-23), taxpayers who are the sole contributors to the Provident Funds, can review their tax planning in order to accommodate for contributions to such funds upto Rs 500,000 or Rs 250,000 (as the case may be) in order to avail optimum tax exemptions on interest derived from the provident Funds. Any interest on contributions exceeding Rs 500,000 or Rs 250,000 (as the case may be) would be subjected to tax.
As such, the taxpayers before making such excess contribution towards PF should also evaluate the other instruments, wherein the rate of return is either comparative or higher, so that they can make informed decision before making such contributions.