Central Government's New EPF Rules

Starting from April 1, 2021, the interest on employee contributions to the PF account of over Rs 2.5 lakh per annum would be taxed. 

The tax would also be applicable for voluntary contributions.

Till March 2020, employer contributions up to 12% enjoyed a tax exemption, any contributions in excess of 12% were liable to tax.

Also, the interest earned on the said contribution was not taxable if the contributory period is more than 5 years.

With this new rule, the 12% interest becomes taxable under the head “Income from other Sources” at the applicable slab rates.

This move targets people with a high-income bracket and high net worth individuals, believing this would reduce income disparity.

This move is also taken to rationalize the tax exemption for the higher salaried group who were earning tax-free income.

The salaried employees who use 'Voluntary Provident Fund' will invest more than the mandatory 12% of basic pay.

The employees earning below this threshold would not be impacted unless they make voluntary contributions to provident fund.

Under section 80C, the employee contributions continue to be eligible for a deduction up to Rs 1.5 lakh.

Provident Fund earns an attractive rate of interest on the outstanding PF balance which is exempt subject to contributory period is 5 years or more.