Tax exemption on voluntary provident fund to be capped

The Budget for 2021-22 did not provide income tax relief to salaried taxpayers but proposed to tax the interest earned by the Provident Fund contributions above Rs 2.5 lakh a year at the normal rates.

This move will hit high-income salaried individuals, who use the Voluntary Provident Fund to earn tax-free interest.

Senior citizens above 75 years of age get an exemption from filing tax returns in case their income comes from pension and interest, and the banks will deduct the necessary tax.

Currently, the interest rate of EPF is 8.5% per annum. The contribution towards EPF is 12% of the basic salary. However, rules allow one to increase the contribution up to 100% of the basic salary. Any such additional contribution is known as the Voluntary Provident Fund and also qualifies for tax benefit under section 80C.

“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,” says the budget document.

Finance Minister Nirmala Sitharaman said the government has noticed that some employers deduct the contribution of employees towards provident funds and other social security funds but fail to deposit such contributions within the specified time, which leads to loss of interest or income for the employees. Such late deposit of employee’s contribution by the employer will not be allowed as a deduction to the employer, she added.