Finance Minister Nirmala Sitharaman, while presenting the Budget 2021, has proposed taxability of interest on various provident funds where income is exempt.

Currently, Clause (11) of section 10 of the Act provides for exemption with respect to any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 1925) applies or from any other provident fund set up by the Central Government.

It means, as of now, interest earned on EPF is fully exempted from tax in the hands of the employee. The government says that 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. This is true mainly in case of employees who contribute towards voluntary provident fund.

Accordingly, the FM says that it is proposed to insert a proviso to clause(11) and clause (12) of section 10 of the Act, providing that 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 Rs 2.5 lakh in a previous year in that fund, on or after 1st April, 2021.

“An interesting change not covered in the Speech relates to taxation of interest earned by employees on their Provident Fund. Interest earned on annual PF contribution exceeding 2.5 lacs from April 2021 will now be taxable. In the 2020 Budget, the FM had capped the tax exemption on employers contribution to PF, NPS and Superannuation fund exceeding an aggregate of 7.5 lakh per annum,” Alok Agrawal, Partner, Deloitte India.

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Currently, the interest rate of EPF is 8.5 per cent per annum. The government had lowered interest rate on Employee Provident Fund to 8.50 per cent for 2019-20 from 8.65 per cent in 2018-19. The contribution towards EPF is 12 per cent of the basic salary. However, rules allow one to increase the contribution up to 100 per cent of the basic salary. Any such additional contribution is known as the Voluntary Provident Fund and also qualifies for tax benefit under section 80C.

“While last year’s change on taxation of Employer contributions would impact higher salalried employees, the change proposed in today’s Budget with respect to interest earned on employee’s contribution will have a much wider impact,” adds Agrawal. This means, going forward, the interest earned on your PF balance if the contribution exceeds Rs 2.5 lakh in a year will be taxable.