Budget 2021: Interest on PF Contribution Above Rs 2.5 Lakh To Be Taxable

The budget has taken away some of the tax-free havens widely used by high-income earners and HNIs. The interest earned by the Provident Fund (PF) contributions above Rs 2.5 lakh a year will now be taxed at the normal rates. This will only apply to the employee’s contribution and not that of the employer. It will hit high-income salaried people who use the Voluntary Provident Fund to earn tax-free interest.

The budget has also proposed to remove the tax exemption under Section 10(10d) to Ulips with a premium of more than Rs 2.5 lakh a year. This will not apply to existing Ulips, but only to policies sold after 1 February this year.

This is not the first time that the government has proposed to tax PF money. The 2016 Budget had proposed that the interest accrued on 60% of the EPF be taxed. The proposal was rolled back after a massive outcry against the new levy.

However, the proposal may not face as big a backlash this time because it affects only the creamy layer of salaried employees. The Rs 2.5 lakh annual threshold means that a person contributing up to Rs 20,833 a month to PF (basic salary of up to Rs 1.73 lakh a month) will escape the tax.

At the same time, the new Wage Code which comes into effect on 1 April 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, which will automatically increase the contribution to the PF.

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