All About Changes in EPF Contribution Taxability

Know Key Changes in EPF Contribution Taxability

In the last year’s Union Budget of 2020, the Finance Minister Smt. Nirmala Sitharaman had capped the tax exemption on employers contribution to Provident Fund, National Pension Scheme and superannuation fund exceeding an aggregate of Rs 7.5 lacs per annum. And, in this year’s Union Budget of 2021, the Finance Minister proposed that interest on employee contributions to provident fund over Rs 2.5 lakh per annum shall be taxable.

Such amendments in the provisions of Provident Fund are being made time and again, to remove the disparity between the high income earners and low income earners. The Finance Minister while presenting the Union Budget of 2021, stated the following in her speech – “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 Rs 2.5 lakh”.

Reasons for changes in EPF Contribution taxability

The Finance Minister further stated the major reasons for which Ministry of Finance has proposed to withdraw tax exemption for interest accrued on contributions to Employees Provident Fund exceeding Rs. 2.5 lacs per annum. These are as follows:

  1. Over 1.23 lakh high net worth individuals are making use of EPF for tax-free income.
  2. Higher contributor of EPF has Rs. 103 crore in his account, followed by two others with over Rs. 86 crore.
  3. Top high net worth individuals have Rs. 825 crore in EPF accounts and top 100 have over Rs. 2,000 crore.
  4. With an average corpus of Rs. 5.92 crores, these high net worth individuals earned Rs. 50.3 lacs tax free interest annually.

From the above reasons, it can be inferred that the move to put ceiling limit on contributions in EPF over Rs. 2.5 lacs per annum has been targeted at the high net worth individuals and to bring them at par with low net worth individuals.  

EPF Contribution & Return Rates

Individual’s annual contribution to Employees’ Provident Fund and the Return Rates to take effect from April 1, 2021 stands as follows:

New Provident Fund Tax Rules from April 2021 : Impacts & Benefits

Therefore, higher the individual’s contribution to Employees Provident Fund is, lower the rate of return is.

Want to know more about the tax changes in EPF? Contact us at TaxHelpdesk and our team will assist you.

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