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Tax on PF interest will change the way we invest in it: How the Budget hits your PF
February, 08th 2021

The proposed tax on Provident Fund interest has come like a bolt from the blue for high-income earners and HNIs who squirrel away huge sums into this taxfree haven. Though the tax will kick in only on contributions above Rs 2.5 lakh a year and will apply only to contributions by the employee, many Provident Fund subscribers are upset.

This is not the first time that the government has proposed to tax Provident Fund 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, this year’s proposal may not face as big a backlash because it affects only the creamy layer of salaried employees. Finance Ministry officials estimate that less than 1% of Provident Fund subscribers will be affected. The Rs 2.5 lakh annual threshold means that a person contributing up to Rs 20,833 a month to the Provident Fund (basic salary Rs 1.73 lakh a month) will escape tax.

While it is true that very few subscribers have a basic salary of more than Rs 1.73 lakh a month which puts their 12% contribution to the Provident Fund above the Rs 2.5 lakh tax-free threshold, it is equally true that a significant number of salaried employees use the Voluntary Provident Fund to invest more than the mandatory 12% of basic pay. “The proposed tax will hit high-income salaried people who use the Voluntary Provident Fund to earn tax-free interest,” says Amit Maheshwari, Partner, Partner, AKM Global.

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