As the new financial year begins, the new Providence Fund interest tax rule will take effect this month. In Budget 2021, Union Finance Minister Nirmala Sitharaman had announced that the government has decided to increase the interest exemption limit for FS to Rs 5. Previously, the limit was Rs 2.5 lakh.
Sitharaman had announced that interest on investments up to Rs 2.5 lakh per year in the PF would be tax-free, but the tax would be levied on interest earned on investment made over the Rs 2.5 lakh limit. It includes the contribution of the employee and the enterprise or employer. The government had taken this step to limit those who earn interest by placing their excess money in a PF account, while the PF is seen as a pension fund for ordinary people.
It can be noted that this is only for employees where no contribution is made on behalf of the employer. This new rule regarding PF enters into force from 1 April 2021 and will be visible in the salary for this month.
The tax-free limit has now been increased from 2.5 lakh per year to 5 lakh. The benefit of this exemption will be only for those PF account holders to whom no contribution has been made by the employer.
Last month, the finance minister informed that usually the employee and the employer contribute to the Providence Fund, but in a case where only the employee contributes, then he / she will receive the tax-free border benefit of up to Rs 5 lakh. The Minister of Finance assured that 92-93 percent of people benefit from the free limit of Rs 2.5 lakh, who are subscribers and the interest they will receive will be absolutely tax-free. Therefore, small and middle class taxpayers will not be affected by this change.
How to understand the new rules of PF
1. Suppose you do a job and have an EPF account, then you and your company contribute 12 percent each. If both contribute Rs 2.5 lakh per year or less, then the interest paid on it will be absolutely tax-free. But you have contributed more than Rs 2.5 rupee cabbage a year, say Rs 3 lakh, you will have to pay tax on any interest you will receive on the excess contribution of Rs 50,000.
2. If you invest in the Voluntary Providence Fund, ie. VPF and Public Providence Fund ie. PPF, then you will not have to pay interest tax received on the total annual investment up to Rs 5. Employers have no contribution to VPF and PPF.
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