Finance minister in Union Budget 2021 announced proposals to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds for high income employees.
"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 ₹2.5 lakh," the budget document said. This restriction shall be applicable only for the contribution made on or after April 1, 2021.
The interest earned by the provident fund (PF) contributions above ₹2.5 lakh a year will now be taxed at the normal rates. Although this will only apply to the employee’s contribution and not to that of the employer.
This is not the first time that the government has proposed to tax provident fund money. The 2016 Budget had also proposed that the interest accrued on 60% of the EPF be taxed. But the proposal was then rolled back.
However, this time around the proposal may not face backlash as it only affects the creamy layer of salaried employees. The ₹2.5 lakh annual threshold means that a person contributing up to ₹20,833 a month to PF (basic salary of up to ₹1.73 lakh a month) will escape the tax.
The new wage code which will come into effect on April 1 has laid down that the basic salary must be at least 50% of the total income of the individual. This means the salary structure will have to be rejigged with a higher basic salary and that will automatically increase the contribution to the PF.
{{/usCountry}}The new wage code which will come into effect on April 1 has laid down that the basic salary must be at least 50% of the total income of the individual. This means the salary structure will have to be rejigged with a higher basic salary and that will automatically increase the contribution to the PF.
{{/usCountry}}The budget has also proposed to remove the tax exemption under Section 10(10d) to Unit Linked Insurance Plan (ULIP) with a premium of more than ₹2.5 lakh a year. This will be applicable after February 1,2021 and not retrospectively.