Budget 2021: Interest income on Provident Fund contribution above Rs 2.5 lakh taxable

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In a move that will affect those getting humongous pay cheques, Finance Minister Nirmala Sitharaman has proposed a tax on interest income earned from provident funds where PF contribution exceeds Rs 2.5 lakh from April 2021.

“Instances have come to the notice where some employees are contributing huge amounts to these funds and entire interest accrued/received on such contributions is exempt from tax under clause (11) and clause (12) of section 10 of the Act,” Sitharaman said.

Clause (11) of section 10 of the Income Tax Act exempts tax with respect to any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 1925) applies.

Currently, an individual can invest up to 12% of basic salary (including dearness) in EPFO. But through voluntary contribution, this limit can be increased to 100%. The EPF rates have been lowered to 8.5% in 2019-2020 from 8.65% in 2018-2019.

“The provisions of these clauses shall not apply to the interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of contribution made by the person exceeding two lakh and fifty thousand rupees in a previous year in that fund, on or after 1st April, 2021, computed in such manner as may be prescribed,” Sitharaman said.