NEW DELHI: Hidden in the fine print of the budget is a blow for many 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.
Many salaried people have preferred 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the money one saves is exempt from taxes in all three stages — when saved, when interest is accumulated on it and when withdrawn.
"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. This restriction shall be applicable only for the contribution made on or after April1, 2021," the budget documents said.
12 per cent of an employee's basic salary and performance wages is compulsorily deducted as provident fund, while the employer contributes another 12 per cent. This means anyone who earns more than Rs 20.83 lakh a year will see his or her interest on EPF contribution being taxed.
"It means the EPF is no longer an EEE scheme but rather a ETE or exempt when putting in, taxed when earning an income and exempt when withdrawing scheme... this will really hit a lot of people especially employees in IT and other sunrise sectors," said Sudhakar Sethuraman, partner, Deloitte India.
Starting salaries in most top Indian firms are well over Rs 20 lakh a year for engineers and management graduates.
"We have also to see the impact of the new labour code which some calculate may result in at least 66 per cent of the total remuneration being turned into basic salary," said Sethuraman.
Tax experts feel this will mean higher EPFO contribution by many more employees without the benefit of tax savings.
It has long been a goal of the finance ministry to reduce the number of tax exemptions on various counts in order to raise more taxes. However, the EPF had been a kind of holy cow that no one had been able to touch till now for political reasons.