Will the new PF rules affect you? Here’s all you need to know

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In Budget 2021, Finance Minister Nirmala Sitharaman announced that tax exemption will not be available on interest income for the year on all contributions to provident fund exceeding Rs 2.5 lakh.

In an interaction with Money9, Sudhir Kaushik, co-founder and CEO, TaxSpanner, explained the reasons behind the move.

“Due to Covid, the Indian economy was hit badly. The government had to increase its income sources. Since it did not change any tax slab and did not add any cess, the changes in PF became necessary for the government.”

As per the new amendment, contribution to employees’ provident fund over 2.5 lakh will be now taxed. Nirmala Sitharaman, in her budget speech, explained that the decision to implement this move was taken to rationalise the tax exemptions as it was introduced earlier with the motive to benefit the low-income group.

“People with income above Rs 40 lakh will be affected because then only their contribution to EPF, which is 12%, will be around 2.5 lakh. All in all, it will not make a major impact even then, to people with such high CTC,” said Kaushik.

For building a retirement corpus, investing in NPS can also be a very good option as it blocks the money for 16 years.

Kaushik said the government is trying to push people towards NPS, and people with high-income bracket can increase their investment in NPS for good returns.

“Those investing in VPF should tilt more towards NPS because its returns are better than PF; more than 10%. Investment can also be done in gold bonds for tax-free returns. Even mutual funds are tax-efficient,” he said.