NEW DELHI: Hidden in the fine print of the budget is a shocker for salaried people – interest on employees contribution to provident fund beyond Rs 2.5 lakh a year or a tad more than Rs 20,000 a month will no longer be tax free.
Most people prefer to save through contributions to the Employees Provident Fund Organisation as this was EEE or Exempt, Exempt, Exempt, a system where the money one saves is exempt of taxes at all three stages — when saved, when interest is accumulated on it and when withdrawn.
“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. This restriction shall be applicable only for the contribution made on or after April 1, 2021,” the budget document said.
Some 12% of an employee’s basic salary and performance wages is deducted as provident fund, while the employer contributes another 12%.
It means anyone who earns more than Rs 20.83 lakh a year will see his or her interest on EPF contribution being taxed.
“This means the EPF is no longer an EEE scheme but a ETE or exempt when putting in, taxed when earning an income and exempt when withdrawing scheme,” said Sudhakar Sethuraman, partner, Deloitte India.
“We have also to see the impact of the new labour code, which some calculate may result in at least 66% of the total remuneration being turned into basic salary,” he added.