FAQ: Will I Need to Pay Income Tax on My EPF Interest From April?
Union Budget 2021 has proposed to levy income tax on interest
earned on employee’s contribution towards the Employee Provident Fund – or EPF
– if the sum is above Rs 2.5 lakh a year, or roughly Rs 20,800 per month.
“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 Rs 2.5 lakh,” Finance Minister Nirmala Sitharaman
said on 1 February, during the Budget speech.
How will this impact salaried taxpayers? What should you know
about EPF?
Who gets EPFO benefits?
The EPF, or simply PF, is a fund collected by a statutory body
established by the Employees’ Provident Fund Miscellaneous Provisions Act,
1952, which benefits employees after retirement.
This scheme is available for those working in companies
registered under the EPF. Every month, both employees and the employers
contribute 12 percent of the employee’s basic salary and dearness allowance
salary towards the employee’s PF account.
Starting from deposits to interests to withdrawal – this sum has
so far been totally exempted from taxation regardless of how large the
contribution is.
Who will be affected by this move?
While this is indeed a blow to salaried people, Sitharaman said
the new tax is for the “big ticket money” people, not the average workers.
“The EPFO is for welfare of workers and workers will not be
affected by this move. It is only for big ticket money which comes into the
EPFO which has tax benefit and also assured 8 percent return,” she said.
However, experts are worried that this would reduce the benefits
of tax savings, and combined with the new Wage Code, also end up reducing
retirement savings.
Since only the interest earned on contributions beyond Rs 2.5
lakh annually to the PF will be taxed, it is obvious that this move will affect
people with a high basic salary – of about Rs 1.73 lakh per month.
But, let’s look at the different scenarios in which it can
impact people with a lower basic salary as well.
Impact of New Wage Code
Combined With EPF Tax
According to the new definition of wages, as part of the Code on
Wages, 2019, passed by Parliament, which is likely to come into effect from 1
April, the government has proposed to increase the employee’s contribution to
PF.
But in order to abide by the new rules, the employers will have
to raise the basic salary of the employee on which the EPF is calculated.
So, for those having basic salary a little lower than Rs 1.73
lakh per month, what this entails is that, because of the new Wage code, the
employee not only takes a reduced in-hand salary home, but with their PF
contribution crossing Rs 2.5 lakh, the EPF tax will also reduce their savings.
Impact on VPF Contributors
A report by The Economic Times also
points out that those with a lower basic salary can be impacted due to contributions
to the Voluntary Provident Fund (VPF).
The VPF is a voluntary contribution option with similar benefits
as the EPF, available for salaried employees. The maximum limit for VPF
contribution is 100 percent of the basic salary.
Let’s assume that an individual contributes equally to the EPF
and VPF, that is 24 percent of their basic salary. In this case, even if their
total contribution exceeds Rs 20,000 per month, they won’t be taxed so long as
their basic salary is under Rs 1.73 lakh.
But if their basic salary is more than that or if they are
“contributing more than 12 percent towards VPF, then you will have to either
reduce your VPF contribution or pay the income tax as per the new rule,” the
report points out.
Why was the decision taken?
So far, despite changes in tax regimes, the EPFO contributions
were left untouched by governments.
But, speaking at the post-Budget press conference, Sitharaman
explained that while the government had exempted PF contribution from being
taxed in a bid to help workers, it was also felt that not taxing high amounts
of contribution may not be fair.
“You find huge amounts, at times, to the extent of Rs 1 crore,
each month. For somebody who puts Rs 1 crore each month, what would be his
salary for him to get tax exemption and an assured return? We thought we are
not reducing workers’ right but at the same time getting tax exemption and also
getting 8 percent rate of interest for somebody who puts Rs 1 crore per month
into the account we thought, maybe it’s not right and therefore we have put
that ceiling,” she said.
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