Nirmala Sitharaman makes employee PF share up to ₹5L tax-free
Union finance minister Nirmala Sitharaman on Tuesday raised the annual limit of employee’s provident fund contribution to ₹5 lakh per annum for the purpose of tax-free interest income, provided no contribution is made by the employer. The Union Budget on February 1 proposed that interest on employee contribution to provident fund (PF) over ₹2.5 lakh per annum would be taxed from April 1.
Replying to a debate on the Finance Bill, 2021, in the Lok Sabha, Sitharaman said: “Through the government amendment that I’m bringing now, I intend to raise this limit to [ ₹] 5 lakh... in those cases, and only in those cases, where there is no contribution by the employer in that fund,” she said.
The Lok Sabha passed the Finance Bill after a discussion.
The move will help the salaried class; for example, in the case of government employees where the employer contribution to the provident fund is nil, two officials, one working in the finance ministry and another working for the Employees’ Provident Fund Organisation (EPFO), said on condition of anonymity.
Most of the private firms and public sector undertakings contribute to employees’ provident fund accounts, they said.
“However, in other cases [private and public sector companies], where the employer and the employee both contribute in the PF fund, the combined annual limit could be ₹5 lakh. If needed, a clarification could be issued,” the person working in the ministry said.
The finance ministry spokesperson did not respond to an email query on this matter.
Speaking in Parliament, Sitharaman justified imposing a maximum limit for tax-free contributions in provident funds on the ground that while it protects the interest of all small and medium taxpayers, it aims to exclude high-salaried class to enjoy assured interest rate with tax exemption. There are less than 1% of the people in the PF system making up to ₹5 crore contributions, and the move excludes such people, she said.
The initial PF investment limit of ₹2.5 lakh for the purpose of enjoying tax-free interest was proposed in the Union Budget.
“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. This restriction shall be applicable only for the contribution made on or after 01.04.2021,”the Union Budget said.