- Date : 29/03/2021
- Read: 3 mins
If both employer and employee contribute towards EPF, the threshold for tax-free income will continue to remain Rs 2.5 lakh.
While discussing the Finance Bill 2021 in the Lok Sabha, Finance Minister Nirmala Sitharaman mentioned that the exemption limit towards Employees’ Provident Fund (EPF) contributions has been increased from Rs 2.5 lakh p.a. to Rs 5 lakh p.a. However, this increase in slab is applicable only for cases where the contribution to EPF is being made by the employee only, and not the employer. In other words, where both employee and employer are contributing towards EPF, Rs 2.5 lakhs would remain as the cap for tax-free interest.
Earlier, while presenting Union Budget 2021-22, the FM had capped the tax-free contribution towards EPF to a maximum of Rs 2.5 lakh in a financial year to dissuade high-salaried professionals from parking excess capital in what is considered to be the common man’s retirement fund. She further clarified that of the six crore subscribers of EPFO, roughly 92-93% subscribers get covered in the Rs 2.5 lakh limit.
While speaking about disinvestment, the FM expressed hope that the government would raise Rs 1.75 lakh crore in the upcoming financial year. She confirmed that Rs 1 lakh crore of this is expected to be raised through the disinvestment of two PSU banks and one general insurance company. The remainder is expected to come from CPSE disinvestment receipts. The revised expected disinvestment receipts fall short of the Rs 2.1 lakh crore that was budgeted in the current financial year.
Related: Online EPF transfer: A step-by-step guide
What has changed?
The exemption is applicable solely on contributions made by the employee, where no contribution is made by the employer. In case the employer also makes a contribution, interest earned on investment made above the Rs 2.5 lakh limit will be taxable.
The proposed changes to EPF contribution will come into effect from 1 April 2021, along with 126 other amendments to the Finance Bill.
Related: How does a lower EPF contribution impact your retirement savings?
How does it work?
Let us suppose you are a salaried professional with an EPF and PPF account. Then one of the following scenarios will apply.
- Scenario 1: You and your employer contribute 12% of the basic salary towards EPF, where the total contribution is less than Rs 2.5 lakh. In this case the entire interest income is exempt from tax.
- Scenario 2: You and your employer contribute 12% of the basic salary towards EPF, where the total contribution is Rs 3.5 lakh. In this, case the interest earned on the surplus contribution (Rs 1 lakh) is taxable.
- Scenario 3: You make a contribution towards PPF of up to Rs 5 lakh, and your employer contributes nothing. In this case the entire interest income is exempt from tax. Lost your job or planning to quit? Here’s how you can benefit from your EPF
How is the interest earned on EPF taxed?
When an employee is taxed for interest on EPF, the interest income is taxed under the “Income from Other Sources” category. As this income arises outside from a source that is outside the typical employer-employee relationship, it will not be considered as a part of the salary. No special rate is applicable for such interest income, and it will be charged as per the provisions of the Income Tax Act applicable at the time of tax incidence.
While discussing the Finance Bill 2021 in the Lok Sabha, Finance Minister Nirmala Sitharaman mentioned that the exemption limit towards Employees’ Provident Fund (EPF) contributions has been increased from Rs 2.5 lakh p.a. to Rs 5 lakh p.a. However, this increase in slab is applicable only for cases where the contribution to EPF is being made by the employee only, and not the employer. In other words, where both employee and employer are contributing towards EPF, Rs 2.5 lakhs would remain as the cap for tax-free interest.
Earlier, while presenting Union Budget 2021-22, the FM had capped the tax-free contribution towards EPF to a maximum of Rs 2.5 lakh in a financial year to dissuade high-salaried professionals from parking excess capital in what is considered to be the common man’s retirement fund. She further clarified that of the six crore subscribers of EPFO, roughly 92-93% subscribers get covered in the Rs 2.5 lakh limit.
While speaking about disinvestment, the FM expressed hope that the government would raise Rs 1.75 lakh crore in the upcoming financial year. She confirmed that Rs 1 lakh crore of this is expected to be raised through the disinvestment of two PSU banks and one general insurance company. The remainder is expected to come from CPSE disinvestment receipts. The revised expected disinvestment receipts fall short of the Rs 2.1 lakh crore that was budgeted in the current financial year.
Related: Online EPF transfer: A step-by-step guide
What has changed?
The exemption is applicable solely on contributions made by the employee, where no contribution is made by the employer. In case the employer also makes a contribution, interest earned on investment made above the Rs 2.5 lakh limit will be taxable.
The proposed changes to EPF contribution will come into effect from 1 April 2021, along with 126 other amendments to the Finance Bill.
Related: How does a lower EPF contribution impact your retirement savings?
How does it work?
Let us suppose you are a salaried professional with an EPF and PPF account. Then one of the following scenarios will apply.
- Scenario 1: You and your employer contribute 12% of the basic salary towards EPF, where the total contribution is less than Rs 2.5 lakh. In this case the entire interest income is exempt from tax.
- Scenario 2: You and your employer contribute 12% of the basic salary towards EPF, where the total contribution is Rs 3.5 lakh. In this, case the interest earned on the surplus contribution (Rs 1 lakh) is taxable.
- Scenario 3: You make a contribution towards PPF of up to Rs 5 lakh, and your employer contributes nothing. In this case the entire interest income is exempt from tax. Lost your job or planning to quit? Here’s how you can benefit from your EPF
How is the interest earned on EPF taxed?
When an employee is taxed for interest on EPF, the interest income is taxed under the “Income from Other Sources” category. As this income arises outside from a source that is outside the typical employer-employee relationship, it will not be considered as a part of the salary. No special rate is applicable for such interest income, and it will be charged as per the provisions of the Income Tax Act applicable at the time of tax incidence.
