FM Nirmala Sitharaman has proposed removal of tax exemption on the interest income earned on the employee’s annual contribution above Rs 2.5 lakh to various provident funds. The step is announced to put a check on tax leak; however it has also rejigged the savings and investment portfolio of the salaried individuals.
That is, contributions to EPF above the capped limit in the next Financial Year starting from April 1, 2021 will be taxed as per your IT slab. The move will largely affect the Voluntary Provident Fund (VPF) contributions of employees which enjoyed Exempt, Exempt & Exempt Status till now.
In other words, a salaried employees’ statutory or voluntary contribution to the provident fund over and above Rs 2.5 lakh per year will attract a tax on the interest earned. The tax is applicable only on the “excess contribution” over the limit. It doesn’t apply to employer’s contribution. Till date, EPF was a popular tax saving & high yielding retirement saving tool.
As per the EPF Act, both employee and employer are required to make a fixed contribution at 12% of the salary for retirement. The employees are allowed to voluntarily contribute more than this amount, without a ceiling to VPF. Thus, high salaried employees enjoyed tax-free interest.
Yes. To some extent this move may change the investment pattern of high salary earners. NPS will be a more preferable retirement tool than EPF. Large contributions to VPF become unattractive.
Other than EPF, the tax payers enjoy EEE status on contribution to public provident fund (PPF) and Tier II NPS under Section 80C for deduction up to Rs. 1.5 Lakh. Contribution to NPS is completely tax-free and the entire corpus escapes tax at maturity, including 40% annuity.
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