Will tax on PF interest also cover contribution to PPF account?

 

Budget 2021 has proposed to levy income tax on interest earned by an employee/person on his/her contribution in excess of Rs 2.5 lakh in a financial year to a provident fund. On a plain reading of the budget documents, it appears that tax will apply to the interest earned on contributions made to Employees' Provident Fund (EPF), Voluntary Provident Fund (VPF) as well as Public Provident Fund (PPF).

Our Opinion

There are separate limits for EPF/VPF and PPF i.e. contributions to PPF and EPF/VPF will not be aggregated for the purpose of calculating the limit of Rs 2.5 lakh.

 

 

This would mean that an individual will still enjoy tax exemption on the interest earned on PPF contributions because a person is not allowed to contribute more than Rs 1.5 lakh per financial year to PPF as per section 10(11) of the Income-tax Act.

 

However, in case of EPF and VPF contributions, the total of contributions to both - EPF and VPF- should not exceed Rs 2.5 lakh in a financial year to enjoy tax exemption on the interest earned on EPF and VPF contributions.

 

If an employee's total contribution to EPF and VPF together in a financial year exceeds Rs 2.5 lakh in a financial year, then the interest earned on the excess contribution will be taxable in the hands of an employee.

The newly proposed tax rules will come into effect from April 1, 2021, once they are passed by the parliament.

:- Anurag A. Roy